New UK insolvency law will change the restructuring game for SMEs
02 July 2020
The new insolvency legislation currently making its way through parliament will have a significant impact on restructuring of distressed SME businesses (the moratorium is not available to companies with publicly traded debt in excess of £10 million). The government intend this as a smaller business rescue and reorganisation tool and not an insolvency or scheme of arrangement based balance sheet restructuring process.
The new legislation provides for a short period moratorium of 20 working days extendable to 40 days in which management can execute a restructuring with an Insolvency Practitioner (IP) acting as monitor. The plan will be subject to final Court approval as “fair and equitable” to all stakeholders, and where any impaired class in the 75% of value in the creditor “cram down” is no worse-off than the alternative (i.e. some form of insolvency process in which trade creditors usually receive very little).
In most cases this time is too short to prepare the restructuring strategy or plan, for the IP to pronounce on business and plan viability, for the company to engage with all the stakeholders, negotiate concessions with the creditors, hold the vote and submit the “fair and equitable plan” to the Court.
Bear in mind that the IP will be supervising the process for all stakeholders. Debtor management stay in charge of operations before and during the moratorium and should be responsible for the restructuring plan, preferably in advance. This is “Debtor in Possession”, a key feature of the US Chapter 11 process.
As in the USA success will depend on prior planning and the knowledge of what is practical and will be acceptable. The outcome will be better for the company if it prepared the plan in advance of the moratorium and not with the intended monitor who must act in all stakeholder interests and would really be conflicted if involved in plan preparation for the debtor.
A pre-moratorium credible plan would be best achieved with an experienced turnaround manager assisting the company management bringing expertise in both operational and financial improvements that can be incorporated in the plan or restructuring solution, engaging with a potential monitor in advance to smooth the passage into a moratorium, an understanding of the alternative to stakeholders, and what would be fair and equitable to the creditors who must vote.
As the company must inform all stakeholders including customers of the moratorium, it begs the question if all parties may be better served if the restructuring plan is achieved consensually without the stigma and loss of value of notifying distress and the need and cost of the supervisor and Court process.
Turnaround managers and operational turnaround processes will have a greater role to play in SME restructuring as Britain emerges from the Covid-19 recession. Management, even those of healthy companies who may be exposed to a potential bad debt, and Funders would be well advised to better understand the turnaround process.
Alan Tilley is Chairman at BM&T European Restructuring Solutions and author of Turnaround Management: Unlocking and Preserving Value in Distressed Businesses.