Dialogue: Compromises can be made to work

By RICHARD AGNEW and CHRISTINE HAYTER*

Companies are being liquidated unnecessarily because a regime allowing an insolvent company to reach a compromise with creditors is not being used enough.

Yet the Law Commission's review of insolvency law recommends that the compromises regime, targeted at small- to medium-sized companies, should remain almost unchanged.



We believe further consideration should be given to changing this regime. It is not used as often as it should be and when it is, it often fails before the creditors' meeting.

There appear to be three reasons:

* Directors enter the regime too late.

* Creditors lack trust and confidence in the company's management.

* There is no automatic standstill period.

Directors of troubled companies often do not seek help until the last moment and don't understand their duties. When they do seek advice, usually after receiving statutory demands, they no longer have the trust of their creditors, who are fed up with empty promises of payment. You can't put together a viable rescue plan in this atmosphere.

The threat of being sued for reckless trading is not incentive enough to enter the regime earlier, as there are few successful cases taken.

Banning orders against delinquent directors have only recently been revived. We endorse the Law Commission's recommendations for greater emphasis in this area of insolvency law.

In Australia, directors of insolvent companies can be made personally liable for certain unpaid taxes. If they enter into a voluntary administration regime, they may avoid personal liability.

Given the recommendations from the first stage of the insolvency law review, for PAYE and GST to become unsecured, the trade-off could be to make directors personally liable for these taxes, unless they enter into a compromise with creditors.

There is no point putting forward a compromise if it is not going to be acceptable to the major and secured creditors. It takes time to put a plan together and to negotiate with creditors to make sure it will work.

During this time the directors are trying to keep the business afloat. They cannot concentrate on doing this while creditors withhold supply, and scramble over each other in a frenzied attempt to salvage as much as they can.

An automatic standstill period is needed before a meeting of creditors considers the plan or appoints a liquidator.

At present it requires a court order for a standstill period against unsecured creditors. It is rarely sought, because the time delay and costs are prohibitive for most small- to medium-sized companies.

One of the reasons given by the Law Commission for recommending the continued involvement by the court is that insolvency practitioners are unregulated. The court must be satisfied that the company is in safe hands before making the order. But the report recommends regulating insolvency practitioners in the longer term. We would support an earlier consideration of this issue.

At present, shareholders can appoint their own liquidator, with a delay of 10 working days before creditors are able to vote to replace that liquidator. During that 10-day period, the liquidator has full powers to dispose of company assets.

During the standstill period to prepare for a creditors' compromise, the company could be run by existing management, with a prohibition on the disposal of assets other than in the normal course of business. Creditors would have to be no worse off after the standstill ended.

Perhaps an administrator might be appointed by the company in the same way as a liquidator, but with powers of veto only.

The Law Commission's report is a starting point for debate on the issues raised. Changes in one part of the insolvency regime may result in side-effects elsewhere that need to be considered.

We welcome being part of the debate.

* Richard Agnew is a partner, and Christine Hayter an associate director, of PricewaterhouseCoopers' Financial Advisory Services. Both practise exclusively in the business recovery area.