"A consultation on potential changes to insolvency laws is to be launched by the government in a bid to give failing companies a greater chance of surviving the downturn.
The move, announced in the Budget, comes amid lobbying by industry professionals who believe the laws need reform. It follows a commitment made by David Cameron, the Tory leader, last summer to import US Chapter 11-style rules to the UK to save companies from liquidation.
The European High Yield Association, a trade body representing investors in some of the riskiest corporate debt, has been lobbying for changes since April 2007.
Gilbey Strub, managing director of the EHYA, welcomed the initiatives but described them as "just a step down a road that goes in the right direction. The government could do a lot more to promote company rescue which would have a direct bearing on job preservation and abating the spread of economic collapse."
In the Budget report the government said it "will work to ensure that the regulations and procedures for dealing with troubled companies work to facilitate company rescues ... that the maximum economic value is rescued from companies that get into difficulties, and that the knock-on effects of company insolvencies on their creditors are minimised."
Neville Kahn, a restructuring partner at Deloitte and one of the joint administrators of Woolworths, which collapsed last year, said he welcomed the move but that "the key now will be to implement changes so that they work in practice to preserve the value of businesses".
The government will consult on a proposal that will allow new funding to companies in insolvency proceedings such as Company Voluntary Arrangements. This funding will have priority over other creditors, similar to a provision under US bankruptcy laws called "debtor in possession".
The second proposal is to extend the moratorium on creditor action against small companies to medium and large companies trying to restructure using a CVA. Shoe retailer Barratts had to be placed in administration to protect itself from its creditors as it tried to negotiate a CVA proposal earlier this year. An administration can damage the value of a business, some insolvency professionals believe."
Picture Credit: http://www.insolvency.gov.uk/