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Change in the Approach of UK Business Insolvency

Change in the Approach of UK Business Insolvency Law explained by Hayvenhursts Accountants.

Most firms know that the UK insolvency law regulates companies from the UK that can’t repay debts. This law is often used for companies that were created under the Companies Act of 2006

Recently, this law was updated as a result of the COVID-19 pandemic and unprecedented practices. Does this result in changes to how your business is structured? Do you need to make any changes to stay compliant?

We are going to address some of the main differences that now exist in the approach of this law. We will also discuss how these changes can directly impact UK companies.

Keep reading to learn about the UK Business Insolvency Law updates and how businesses are being affected below.

Change in the Approach of UK Business Insolvency

The Major Changes: Schemes of Arrangements and Restructuring Plans

Scheme of Arrangements are court-based processes used by a company with financial concerns. It helps them reach an agreement with creditors and shareholders to pay back the debts over time.

The courts get the final say in whether or not the agreement appears to be fair and reasonable. This is based on a preset list of factors. They also will determine if there is an authentic attempt to reach this agreement.

Schemes of Arrangements are often for businesses when redress is due to consumers. This may be, for example, as a result of a Financial Ombudsman Service investigation. These are useful agreements in that they can help a firm manage unexpected liabilities from such investigations.

Restructuring Plans can be used to eliminate, prevent, reduce, or mitigate negative impacts on a company’s business operations.

Firms create this if they are expecting serious financial limitations or difficulties in the future. These are taking over from previous UK Scheme plans. 

The FCA’s Role and Guidance

The FCA is the regulator for financial services firms and markets in the UK. It must pursue specific objectives, including consumer protection

As a result, the FCA will assess all Schemes of Arrangements or Restructuring Plans. They make sure that any restructuring is within the confines of the rules presented. Generally, the requirements stated here are going to be less specific than what is considered by the courts. 

The FCA has a right to representation at court or creditor/shareholder meetings for restructuring. Having early and open engagement with the FCA will help businesses facilitate an effective arrangement. This is something all company owners need to consider when restructuring. 

There has been a rise in the use of Schemes of Arrangements in regulated businesses. This is what prompted the FCA to commence consultation on its guidance and approach. There is a deadline for response to this on 1 March 2022. 

The guidance provides useful clarity on the expectations of the FCA.

However, there is concern regarding the increased scrutiny of compromises. This might result in subprime lenders being held to regulations that they cannot afford.

In turn, this would result in market issues that might eventually cause more business failures in the UK.

Unfair Use of Insolvency Law

Some firms have not been informing the FCA when they are considering Schemes of Arrangement or Restructuring Plans. This has resulted in court warnings that impact any company considering restructuring. 

Remember that it’s best to work with the FCA from the start if you plan to restructure your firm.

The FCA has specifically stated that such firms using insolvency or company laws to gain unfair benefits could face court action.

This is due to an increase in the number of firms that are developing these proposals for disingenuous reasons.

It has been made clear that any firm that wants to limit liabilities should be putting the best outcome for consumers first. Consumers should come before any benefits the company itself may reap as a result of restructuring.

This means that firms should aim to provide the maximum amount of funding possible to meet compensation claims made by consumers. Not doing so can lead to the FCA objecting to the proposal in court, which likely would lead to further legal implications. 

An Overview on the Permanent Changes to the Law

As a result of the concerns presented by the FCA, there have been permanent changes made to the UK Business Insolvency Law.

There is now the new restructuring procedure called the Restructuring Plans, which is replacing the UK Scheme. The main difference here is that Restructuring Plans allow firms to “cram-down” dissenting classes.

Another permanent change proposed is a ban on ipso facto clauses. This would prevent suppliers from changing their supply to a specific company. This is no longer allowed based on that company starting insolvency or restructuring practices.

There is also now a suspension procedure for companies that have financial difficulty. 

An Overview on the Temporary Changes to the Law

In addition to the permanent changes, temporary changes are also proposed to help businesses during COVID-19. These are more specific to the difficulties presented by the pandemic for businesses. 

During this time, there will be a relaxation on wrongful trading rules. As a result, the risk that directors will be held personally liable for trading between 1 March 2020 and 30 September 2020 will get reduced.

There are also temporary changes to how and when creditors can present statutory demands or winding-up petitions. These are also with retrospective effect. 

There will be flexibility on requirements concerning holding shareholders’ meetings. Firms may also receive an extension of time to ensure certain filings at Companies House (when necessary). 

Work With Accountants to Avoid Financial Difficulties

It’s crucial to understand these changes in insolvency if you operate a company in the UK. Avoiding having to restructure at all is the most proactive plan. Getting help from expert-level professionals is a great place to start.

Working with experienced accountants will help you with financial plans and raise your capital. Are you seeing a downward trend in your company’s finances? Our accountants can help you figure out how to best restructure the company. 

It’s time to start taking advantage of these types of services. If you want skilled professionals on your company’s side, get in touch with us today, and learn about what we can do to help. 

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