Proposed changes to UK insolvency law, contained in a government consultation document, could have unintended consequences for banks and third-party supply chain finance providers, say industry experts. The new regime could increase SMEs’ demand for supply chain finance while at the same time reducing banks’ appetite to provide it.

The consultation highlights four key areas of improvement in the law: the creation of a new moratorium period for financially distressed companies; provision to require essential suppliers to continue to supply on existing terms; creation of a new restructuring plan by insolvency professionals; and measures to encourage rescue finance.

The creation of a moratorium period would give troubled businesses a yet-to-be-defined period of breathing room during which historic liabilities would be frozen, allowing the business to work with insolvency practitioners to help restructure its debts.

The association for business recovery, R3, has recommended a 21-day moratorium period although others say it should be 28 days, or longer after application to the courts. R3’s president Andrew Tate told SCF Briefing, “Companies in cash flow difficulties can stop the merry-go-round for a few weeks and come out having gotten over the cash flow hiccup. The idea is that the directors of the company would go into the moratorium working with a professional insolvency practitioner, who will monitor the moratorium and who can say this [process] is properly managed,” even though the business may not be viable.

“Self-perpetuating”

However, Philip King of the Chartered Institute of Credit Management (CICM), raises concerns that a moratorium may not have the desired outcome because of the reputational impact. “The minute you say ‘moratorium’, the creditor community will assume the company has gone bust,” he says. “It becomes self-perpetuating: it goes from a business wanting to save itself by going into a moratorium, but the impact of that could be the opposite.”

King cites the example earlier this year of Polestar UK Print. The printer’s largest client, DMG Media, decided not to roll over (‘novate’, in the industry jargon) the old contract to the newly-restructured business, ultimately forcing Polestar into administration.

King acknowledges, however, that the proposals relating to the compulsory provision of essential supplies to troubled businesses could help mitigate against the perceived negative impact of the moratorium period.

The essential suppliers part of the framework details that suppliers, which are deemed essential to the running of the business, will be legally obliged to continue to supply goods and services and on the same terms.

Tate says that this has long been part of UK law but that the government proposes broadening the scope. “Any supplies used during the moratorium should be paid for. Whilst there may be a freeze on historic liabilities, any new ones should be paid for,” he says. However, Tate says a dilemma could arise if there is a “knock-on effect” in the supply chain when suppliers also find themselves in financial difficulty because of the threatened loss of a customer.

Impact on supply chain finance

Both King and Tate acknowledge that there could be an effect on the pricing and availability of supply chain finance. “There will clearly be a change in [lending] margins” because of a greater risk to banks and other finance providers. “Their appetite for providing SCF would be at least reviewed,” he says. “It could impact on the availability [of SCF] as they would review the risks in their portfolio.” Finance providers could be reluctant to lend if the new regime is risker for them when they take on suppliers’ invoices. On the other hand, demand for SCF on the part of suppliers could increase “as trade creditors would be keen to see SCF and take money earlier, even at a price, on the basis that it’s safer.”

The Review of the Corporate Insolvency Framework brought together industry leaders, academics, regulators, banks and other stakeholders to find ways to update legislation which has remained largely unchanged since 2004. The global financial crisis and the subsequent reduction in available credit saw many otherwise viable businesses go under. This consultation is being seen as an opportunity to enable more corporate rescues. It is also being seen as an opportunity to bring the UK in line with existing US and European legislation. Tate says the proposals could be introduced into law in 2017.

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