Late Payments Still Causing Problems For Regional Businesses Throughout the UK

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companies facing insolvency proceedings

A new study by insolvency trade body R3 indicates that late payment of invoices is still causing problems for a substantial proportion of regional businesses throughout the UK.

R3’s latest Business Distress Index, which regularly assesses levels of growth and distress among UK companies, found that 16% of regional businesses are currently suffering one or more of five key indicators of distress, compared to 22% of them last April.

Struggling companies to get three-month breathing space

The government is consulting on giving insolvent or near-insolvent companies a three-month moratorium from creditor action while rescue plans are put in place. During this time, an ailing firm can plan a rescue and keep creditors informed without worrying about a winding-up petition.

Since most insolvency procedures are largely unchanged since 2004, the government said that it was “assessing whether they are still fit for purpose”, and it is also considering measures to give smaller firms in financial difficulty protection from being "held hostage” by key suppliers seeking to profit from a company’s distress. The government is concerned that large suppliers are altering their terms or withholding their services when a business gets into difficulty at the expense of other creditors, and thus harming chances of a rescue.

Business secretary Sajid Javid said: “The UK’s corporate insolvency regime is already highly regarded. But with the business world becoming ever-more fast-paced and complex, it is time to ask ourselves whether – and how – the system can be improved."

The proposals are outlined in a consultation paper published by the Department for Business, Innovation and Skills.

R3 has welcomed the moratorium proposal, pointing out that it had proposed its own, very similar, version of the moratorium and has been advocating changes to the rules on supplying businesses in a rescue procedure since 2010.

However, Andrew Tate, president of R3, believes the proposed moratorium is too long: its own proposal was for a three-week moratorium with a potential three-week extension.

Mr Tate said: "The longer the moratorium is, the harder it is to fund the business, the easier it is for things to go wrong and for creditors to lose money, and the more frustrated creditors might become . . . It is important that a moratorium is palatable to creditors."

Further proposals in the government’s consultation document

The extended moratorium is one of a number of proposals in the government's consultation document.

Another proposal is for the development of a flexible restructuring plan which would provide for all creditors to be bound by the terms of the plan: secured as well as unsecured. Such a measure will also allow the restructuring plan to be imposed on a class of creditors, even if they vote against it, as long as they will be no worse off in a liquidation.

The consultation paper also notes that the UK lacks a broad and established market in specialist rescue finance, and that the government is keen to encourage and develop greater access to finance of this nature. However, the proposal stresses that this must be achieved with clear parameters and safeguards as to the priority of repayment of this finance, compared with other creditors of the company and protections for the financier if attempts to rescue the company ultimately fail.

Rescue financing is at the moment permitted as an expense in an administration procedure: the new proposed measure could mean a re-ordering of the current priority of administration expenses to encourage rescue finance.

World Bank praises UK insolvency regime

The UK insolvency regime provides lenders and businesses with confidence to lend and trade, secure in the knowledge that if things take a turn for the worse, debts will be settled in a fair and expeditious manner.

The World Bank says that, following a company insolvency, creditors in the UK see more of their money returned, more speedily and at a lower cost than their peers in the US, France, and Germany.

Contact our insolvency and corporate recovery lawyers today

Our insolvency and corporate recovery team is able to offer you that level of expertise at a time when you really need the support to get through potential or current difficulties. For advice, contact a member of the team, call us today on 01895 207973 or email corporate@ibblaw.co.uk.

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