Supply chain · 31 May 2016

Smaller firms at risk from proposed changes to insolvency framework

insolvency
New insolvency framework proposals offers company owners a 90-day window in which to consider the best way of rescuing their business

A proposed move to a new corporate insolvency framework for struggling UK businesses could have major consequences for the cash flow of creditors and thousands of small firms within supply chains.

Following a recent review of the corporate insolvency framework by the Insolvency Service (IS), chief executive of the Chartered Institute of Credit Management (CICM), Philip King, delivered a stark warning to small business owners that adopting a “Chapter 11”-style insolvency framework would leave the system open to abuse.

According to King, the proposed framework – similar in style to that in the US – would make it almost impossible to distinguish between failing firms that were either “good” or “bad”.

Central to the proposals is the creation of a new moratorium that would provide company owners with a 90-day window in which to consider the best way of rescuing their business whilst free from any enforcement and legal action by creditors. The 90-day moratorium would include the chance of an extension if necessary.

Commenting on the proposals, King said: “Viewed positively, this is a 90-day window for a company to work with a supervisor to turn a business around, save jobs, and secure a long-term future.

“Looked at another way, it is 90 days in which the less scrupulous can fritter away assets whilst being ‘untouchable’, to the serious detriment of creditors and the stability of a supply chain.”

In the government’s forward to the IS consultation, business secretary Sajid Javid said that the proposals went some way towards giving businesses of all sizes the best chances of survival.

“Whether it’s a kitchen-table startup or massive multi-national, nobody ever wants to see a company in trouble. Sometimes insolvency is unavoidable, and should the worst happen to a business, we have a duty to give it the best possible chance to restructure its debts and return to profitability whilst protecting employees and creditors,” added Javid.

King went on to say: “It is naïve to think that the system will not be open to further abuse by unscrupulous company directors without adequate or appropriate oversight. The challenge will be in ensuring that such oversight is rigorously monitored and the process sufficiently transparent.”

Read on to find out why micro firms are most likely to suffer from repeat client insolvencies.

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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