News | Published April 10 2020

Mayfair Kitchen Studio founder backs calls to change insolvency rules

John Shaw, the founder and managing director of Cheshire-based business Mayfair Kitchen Studio, has backed calls from legal experts to overhaul insolvency rules to help businesses see out the Covid-19 UK lockdown period.

The Sunday Telegraph reported on April 4 that March liquidations reached the figure of 3,807, up from 2,183 in February.

“The impact of this sharp spike has been immediate”, Shaw said.

He added: “Several law firms are exploring possible changes to insolvency rules and if some real weight is put behind these moves, it can only do a lot of good for business.”

According to the Sunday Telegraph report, the sort of overhaul that legal experts are pursuing will look to create a Chapter-11 style bankruptcy protection regime, in response to the sharp rise in companies ceasing to operate since the pandemic began.

Coinciding with the increase in liquidations was a near one million rise in extra claimants for universal credit across the fortnight preceding April 4.

Mark Phillips, one of Britain’s leading insolvency experts, is heading up the proposals.

Phillips’ plans outline a new regime known as “protective rescue administration”, which he believes “will leave us [the UK] with an economy as opposed to a dust bowl”.

Phillips plan would be a U-turn for administration proceedings, reverting it back to its initial purpose of rescuing companies, rather than winding up businesses that are failing to break even.

Under the plans, administrators would consent for the management of a firm to continue to run the business, during which time the existing administration framework would protect the business from being wound up, and stop creditors from making claims against its assets.

The moratorium would then give the insolvency practitioner ample time to devise a long-term plan for the struggling firm. This could involve other agreements being made with creditors, such as debt-for-equity trade-offs.

The Sunday Telegraph report quotes the Queen’s Counsel's response as follows: “We are going to have a lot of businesses which were perfectly good businesses which, throughout this lockdown, will have no income but accrue all sorts of liabilities.

“The idea that a restaurant or a hairdresser on low margins will be able to deal with the legacy debt is fanciful.”

The Queen’s Counsel has already consulted a number of major accountants and trade bodies including the Insolvency Lawyers’ Association and R3. The QC added that all backed the government’s plans for a moratorium that were revealed recently.

Phillips said: “Given the length of time it is going to take to get government legislation through and then get the profession comfortable with using it, I am focused on using the tools we already have. What I am trying to do is give insolvency practitioners and businesses the tool they will need to find a long-term solution to a short-term problem, the legacy debt.

“I strongly believe that if used properly we can save livelihoods and also it will be the difference between a recession, that is inevitable, and a depression.”

Christina Fitzgerald, who sits on the R3 board, added that “adapting” existing restructuring tools was the priority to help businesses through the Covid-19 crisis.

The government has already been proactive by relaxing regulations on wrongful trading in an effort to avoid firms having to declare themselves insolvent, but backing a re-writing of insolvency rules but be a whole new step.

Secretary state for business, Alok Sharma, said: “These measures will give those firms extra time and space to weather the storm and be ready when the crisis ends whilst ensuring creditors get the best return possible in the circumstances.”

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The Parliamentary Review

April 10 2020

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