The UK Rescue Moratorium and the Australian SBR

This article first appeared in the July, 2021 edition of South Square Digest and is reproduced with permission.

In the United Kingdom, a new formal rescue process was enacted, in the form of a restructuring plan with a cross-class cram down in the Companies Act 2006 (UK) (Companies Act) which is (apart from the cram down provisions and various other modifications) modelled on the scheme of arrangement in Part 26 of the Companies Act. In addition, the same legislation, the Corporate Insolvency and Governance Act 2020 (UK), also introduced a standalone moratorium in new Part A1 of the Insolvency Act 1986 (UK) (Insolvency Act) designed to promote informal rescue.

The moratorium is the focus of this article. In essence, this process enables eligible companies to file for a minimum 20 business day moratorium, effective against both secured and unsecured creditors and under the supervision of an independent monitor, in circumstances where it is likely to result in the rescue of the company as a going concern. In practice, during this time, directors will work to negotiate an informal restructuring plan or otherwise position the company for a formal rescue process.

In contrast, the new small business restructuring (SBR) process in Australia, which has applied since 1 January 2021 by way of amendments to the Corporations Act 2001 (Cth) (Corporations Act), is limited solely to SMEs. It takes place under the supervision of a small business restructuring practitioner (SBRP) while directors remain in possession of the company. Unlike the United Kingdom Part A1 moratorium, the Australian SBR process also expressly incorporates the development of a formal restructuring plan as an intrinsic part of its operation rather than as a distinct process that can result in an informal restructuring, a plan or a scheme, or a formal insolvency process.

Despite those differences, however, a monitor under the Part A1 moratorium and a SBRP under the SBR process face the same lack of clarity about what is expected of them in terms of their independence and investigatory duties. Given the collaborative working relationship contemplated by each of the debtor in possession (DIP) modelled processes between directors and the monitor/SBRP, a broader interpretation of a practitioner’s independence obligations might potentially be supported by the existing legislation. That said, in Australia, it is unlikely the courts would take this view given the traditional strict approach to the independence requirements of other insolvency practitioners, especially in the context of pre-appointment work. To date, the United Kingdom courts have not taken a similarly strict approach to independence requirements, in particular in the context of pre-pack sales in administration (but see further below).

In relation to investigations, there is a strong argument that, given the intention for Part A1 and the SBR process to operate as simple, expedient and cost-effective insolvency alternatives, it would not be feasible for a monitor or a SBRP to engage in the level of investigations expected of a liquidator or administrator. Unfortunately, that limitation of the monitor’s role is not reflected in the express wording of the current legislation.

It is suggested that clarifying regulations should be introduced to provide practitioners with the certainty they require, in order to avoid a disincentive to the acceptance of future appointments and to avoid such appointments being prohibitively expensive, and instead to promote the use of the new processes in a manner that will enhance the rescue culture in both countries.

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