Government proposals to introduce a three-month moratorium from creditor action for distressed companies would impinge on creditor rights, according to insolvency trade body R3.
A government consultation aimed at improving the efficiency of the rescue tools available to UK companies closed yesterday.
Among the proposals included in the consultation is the introduction of a three-month moratorium for distressed businesses to prevent creditors pursuing debts while rescue options are being considered.
This would bring the UK system more in line with the US' Chapter 11 bankruptcy regime.
R3, a trade body for business recovery professionals, has argued that three months is too long – it proposes a shorter 21-day moratorium – and that the protections proposed by the government are not strong enough to prevent abuse and protect creditors.
"A moratorium on creditors pursuing debts can be necessary to give a company time to put a rescue plan into place, but this would impinge creditor rights," said Andrew Tate, president of R3.
"A shorter moratorium than proposed by the government and a supervisory role carried out by a properly regulated and experienced individual would help provide the safeguards the moratorium needs."
R3's criticisms mirror those of the Chartered Institute of Credit Management, which said moving to a Chapter 11-style system could have "serious consequences" for creditors.
"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," CICM chief executive Philip King said.
"Looked at another way, it is 90 days in which the less scrupulous can fritter away assets while being 'untouchable', to the serious detriment of creditors and the stability of the supply chain."
R3's Tate also argued that the government could avoid the need for major reform by introducing some "simple steps" to boost business rescue.
"CVAs have the potential to become a much more effective business rescue tool than they are now. And the government, as a creditor, can do much more to support business rescue efforts and encourage struggling businesses to seek advice earlier," he said.
Other proposals on the table in the government consultation included widening the definition of essential supplies to assist distressed business.
Developing a new restructuring plan to increase the options available to rescue business, and increasing the availability of rescue finance, were the other two key proposals.
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