Initiative to save failing businesses may affect creditors

The Chartered Institute of Credit Management (CICM) has expressed concerns over a recent move proposed by the government, which could have serious consequences for creditors.

The move proposed, similar to the USA’s chapter 11, aims to ensure businesses that are distressed yet viable can be rescued quickly from insolvency. The government has previously stated that having an efficient and effective insolvency regime is one of the ways to promote entrepreneurship, investment and employment.

The CICM has warned that such a move would have a huge impact on the cashflow of SMEs and thousands of businesses in the supply chain.

While the new government proposals don’t seek to support failing businesses without any hope of recovery, the CICM believes it will be a fine line to distinguish the good from the bad. This means that the system may be open to abuse.

Moratorium

One of the biggest concerns is the proposal to create a new moratorium, which would provide companies with an opportunity to consider the best approach for rescuing the business whilst free from enforcement and legal action by creditors.

The proposed moratorium would last for three months, with the possibility of an extension if needed.

Philip King, chief executive of the CICM, has warned:

“A moratorium is not intended to allow failing businesses merely to buy time with creditors when in practice there is no realistic prospect of a rescue or compromise being reached.

“Viewed positively, this is a 90-day window for a company to work with a supervisor to turn the 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 the supply chain.”

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