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The regulations surrounding company insolvencies have long been a bone of contention for those in industry. But last week, after years of complaining, UK PLC was given something to consider when the Insolvency Service announced a consultation on a moratorium period for companies that are struggling financially.

Much of the anger that is generated in the print industry by pre-pack administrations stems from the perceived use by some companies of underhand tactics – back-room deals, organised in secret, seal the future of an ailing firm before suppliers and would-be buyers even know it’s going under. There’s no time to question the deal, put an offer in or even have a discussion with the administrator.

The proposed moratorium would give struggling companies 12 weeks protection from suppliers while they attempt to "reorganise" the business, which, based on the consultation, would more often that not involve a Company Voluntary Arrangement (CVA).

Before a moratorium was entered into, a company would have to get the go-ahead from the courts, and secured creditors would have the power to reject the application if they opposed it.

While this would, or should, lead to companies going about a rejig in a more open fashion, in its current format the proposal has met with criticism from the print industry.

Paper merchant Elliott Baxter’s managing director Tim Elliott says that he welcomes anything that would curtail the growing numbers of insolvencies, but adds: "In my experience, CVAs don’t work, so creating more is not the way around the problem. It isn’t the suppliers that companies need to be protected from anyway, it’s the banks. It’s rare that a supplier will be the one that forces a company to close, the lender will do that."

Courting power
Controversial former MPI director Mike Dolan, who called for a bankruptcy protection scheme to be set up in the UK prior to the administration of £65m-turnover print group MPI, agrees and argues that for the moratorium to work, more power needs to be transferred from the banks to the judiciary.

"Secured creditors, typically a bank or invoice discounting house, reap very substantial rewards by pushing their clients into administration, and they are likely to continue exercising that option by withholding their consent, to the detriment of trade creditors," he says.

"I believe the courts should play a more active role and have the ability to impose a settlement on creditors, particularly secured creditors, if in its discretion it finds that such a settlement will serve the greater good."

Forcing the court to take a more proactive role would bring the restructuring moratorium much more closely in line with its existing US cousin, Chapter 11 bankruptcy protection, which has been used by the likes of Quebecor World and Reader’s Digest Association to restructure their businesses during the recession.

However, John Gilmore, managing director at finishing equipment manufacturer Autobond, which has a US arm, does not believe that a Chapter 11-style system is a viable plan.

He says: "Chapter 11 is not great, creditors are often stuffed from the start. When I was over there, the amount of airlines that filed for chapter 11 was ridiculous. They knew they were failing and they knew what they were doing, I doubt there are many success stories that come out of Chapter 11."

For finisher David Nestor, managing director at First 4 Print Finishing, anything that addresses the issue of pre-pack administrations is a good thing. However, he feels that an optional moratorium period will not make a significant improvement in the print industry, particularly in his sector.

He says: "Obviously, this is progress, but I wonder how much of an impact it will have. But it does address one key area that upsets people, pre-packs – the cloak-and-dagger element, when everything seems to be done under the radar."

Conflict of interest
If a lack of transparency is one of the main controversies in the current system, it goes hand-in-hand with the role of insolvency practitioners, who are regularly attacked for the lack of value they deliver to trade creditors, particularly in light of the high fees they charge.

Dolan argues that the moratorium still hands too much power to the insolvency practitioners, who will be tasked with overseeing the restructuring process, and by extension the secured creditors who are instrumental in their appointment.
"IPs have a strong bias to serve the interest of those providing them with repeat business and that will be the bank or invoice factoring house," he says.

"This is a key weakness in the proposal and also where it opens a conceptual chasm from Chapter 11. In the latter legislation the court assumes a far more proactive role and has the ability to impose good proposals if agreement is otherwise being thwarted by a hold-out creditor."