When a UK business is struggling, the choices can seem restricted to insolvency procedures that do not always provide the required solutions and are often forced on the business owner by the creditors. To avoid insolvency can mean entering into arrangements with creditors together with possible refinancing, but that sector has become increasingly difficult over the last few years.
The courts can order a small business to be assigned a liquidator if it has proven that the company cannot pay its debts, or that it is just and equitable to liquidate the company’s assets, sometimes forcing companies into bankruptcy where some consider whether they have a chance of survival if other alternatives are available.
In light of the positive critique of the Bankruptcy Chapter 11 system used in the United States, Brussels has announced proposals to reform the current business restructuring and insolvency rules throughout Europe. The proposal is to increase the legal protection that small and medium sized businesses have against creditors to try to reduce the closure of businesses that do have potential.
This is a step in the right direction for the progress and development of the Capital Market Union (CMU), which is part of the European Commission’s plan to organise capital across Europe. CMU seeks to remove obstacles to the free flow of capital across borders and so harmonising aspects of national insolvency laws across Europe will be a priority. This unification is a bold step that would require all member states of the EU to adhere to the terms and so could face contest in the European Parliament. A number of individual nations have already expressed their intention to protect their own insolvency laws and oppose change.
Encouragement to start businesses
There are also plans that are aimed at encouraging prospective entrepreneurs to start their own businesses and to give failed businesses a second chance by cancelling any legacy debts after three years. A unification of rules across Europe will open up the flow of capital across borders, and allow for more businesses to access the capital market to gain funding, and easier and cheaper trade. It is important to note that until the UK formally withdraws from the EU, laws passed by the European Parliament will have to be obeyed by businesses and courts in the UK.
The most common circumstances in the UK in which a company is faced with winding up repercussions are if the company is unable to pay its debts, or if it is just and equitable for the company to be wound up. There are quite strict rules for new SMEs, especially due to the current lower limit of unpayable debt being £750. The new proposals may allow a court to grant a struggling company protection for up to four months while it is able to enter into negotiations with its creditors for voluntary debt restructuring process. This allows companies struggling with cash flow the chance to take a breath and not be forced into liquidation. This idea is not dissimilar to the Bankruptcy Chapter 11 system used in the United States; one which has been praised by European investors and business owners for a long while.
There are currently extremely low levels of insolvency throughout the UK, almost the lowest since the 2008 financial crisis. Some consider this to be due to the stigma associated with declaring a company bankrupt, and therefore effectively limiting growth of the economy. The idea of four months protection from winding-up orders is of great importance to SMEs and is a large increase on the three-week time period businesses have at the moment. It would allow struggling businesses the chance to evaluate their business model and resolve any issues.
The focus is on helping SMEs get back on their feet while also offering an incentive to entrepreneurs to start up new businesses without worrying about debts from a previous failed venture. However, there has been some dispute that the note does not go far enough and could just add more complexity to an already complicated matter. Others discuss concern about whether the plans go far enough to sort out the current differences in insolvency laws.
Vanessa Crawley is a solicitor in the corporate team at SA Law.