Time to rethink the relationship between creditors and debtorsby James Mather / April 24, 2020 / Leave a comment
During this early phase of the Covid-19 crisis, the government’s support for businesses has rightly focused on preserving workforces, deferring liabilities and improving access to cash. But this has merely kicked the fizzing can of debt down the road. It seems likely that, once the lockdown ends, huge numbers of businesses will survey the scene and find that, despite government assistance, they have accumulated hopelessly unpayable debts.
At that point, the operation of the insolvency laws will do much to determine the future of the economic landscape and whether a depression has been avoided or merely postponed.
But those laws were not designed for anything like the present shock. It is clear that the goal ought to be to save otherwise good businesses that have been struck down by the Covid-19 storm. Achieving that will involve a combination of the innovative use of existing legislation and the implementation of new statutory measures.
For some time, the trend of policy has rightly been towards promoting rescue whenever distressed businesses are fundamentally sound, while keeping the costs of entrepreneurial failure within reasonable bounds. That encouragement of enterprise and risk-taking, though, has always needed to be balanced against the need for a stable and predictable environment for providers of credit.
In the perennial trade-off between the interests of creditors and debtors, the UK’s insolvency laws are still generally perceived as friendly to the former, in contrast to the more debtor-friendly regime across the Atlantic. A smart initiative led by the insolvency profession has sought to tilt the balance within the framework of existing legislation. In the immediate pre-Covid-19 era, high-profile insolvencies of the likes of Carillion and BHS cemented the link in the public mind between the administration procedure and business failure. In origin, though, the focus of administration (in contrast to liquidation) was on rehabilitation, affording temporary protection from enforcement by creditors while an insolvency professional restructured the business.
A new “light-touch” form of administration is designed to restore the procedure to its rehabilitative roots. This is the method that has recently been adopted for Debenhams: although administrators have been appointed to the company, the existing management will remain in place under their supervision. The effect of the administration is still to afford the company a period of respite from its creditors.…