New insolvency law gives banks ‘super-priority’ status, say accountants Mercer & Hole
New insolvency laws will push banks with claims against insolvent companies to the front of the queue, over-riding the new moratorium on creditor actions, say accountants Mercer & Hole.
Chris Laughton, a corporate restructuring partner at Mercer & Hole explains:
“The Corporate Insolvency and Governance Bill, which is expected to receive Royal Assent this week, is designed specifically to give insolvent businesses a breathing space to restructure. Yet, through what can only be described as a boost for banks and financial institutions, it stops some companies from accessing the protection they need. The Bill as currently drafted effectively gives banks a super-priority status.
“The problem is in the wording around the newly introduced moratorium on creditor actions, designed to give businesses and their advisers the breathing space to restructure and save the business.
“Businesses that use this moratorium need to appoint a monitor, a licensed insolvency practitioner, who must be convinced the business can be rescued as a going concern, meaning debts falling due during the moratorium period must be serviced. That moratorium will last for four weeks but can be extended.
“Banks and financial institutions tend to be the largest creditors of an insolvent company, and the Bill currently excludes them from the so-called payment holiday that other creditors will face. While banks can’t call in loans during the moratorium, any loans or other facilities that expire during the moratorium will have to be repaid or renegotiated.
“Very few companies can repay bank facilities and any negotiation could prove one-sided. A bank or financial institution that insists on repayment will mean the monitor having to end the moratorium. Then, in the insolvency that will inevitably follow, the bank will be paid first. Any bank debts that fell due during the moratorium will be paid before any other creditors and even before the costs of the insolvency process.
“The Bill effectively allows banks and financial institutions to defeat a moratorium that should protect the company, and to take super-priority over all other debts at the same time.
“Although the government did change a mistake in the drafting as the Bill went through parliament to stop banks and financial institutions calling in their debts during a moratorium, it didn’t go far enough. Further amendments are needed to take into account bank loans that fall during the moratorium if the legislation is to achieve what businesses hope.”