A consultation was launched on Monday (26 July) into the proposed restructuring moratorium, which will run for 12 weeks until 18 October 2010.

The Insolvency Service said that there was a risk that otherwise viable companies could be forced into insolvency under current legislation due to the increasing cost and complexity of a negotiated restructuring.

It has proposed a restructuring moratorium to provide companies "where the core business is viable" with the option of "a protected breathing space" during which a restructuring could be negotiated and some form of compromise reached.

Introducing the consultation, minister for employment relations, consumer and postal affairs Edward Davey said: "For otherwise viable businesses, where a restructuring is a realistic prospect, the proposals provide the option of a breathing space during which a restructuring can be negotiated and implemented, outside of formal insolvency procedure."

The proposal is very similar to the Chapter 11 bankruptcy protection process used in the US, which allows for a distressed company's directors to attempt to restructure the business as debtors in possession (DIP) under the supervision of a Court.

The report said that the dangers were greater for larger companies. Mike Dolan, controversial former director of collapsed £65m-turnover print group Media & Print Investments (MPI), said that the proposal would avoid the prospect of a "beleaguered company being susceptible to one recalcitrant creditor holding out under threat of issuing a winding-up order", in circumstances where other creditors have agreed a moratorium.

"If such an option existed, I believe there would be far less use of pre-pack deals and administrations," he said.

"A viable and achievable settlement would have to be negotiated with creditors to achieve the necessary consensus and court approval."

Technoprint managing director Mark Snee said: "Something like Chapter 11 is excellent, I would 100% support it. There needs to be some sort of court oversight in what is going on, at the moment it is too easy to carve things up behind the scenes."

Unite also voiced its support. Assistant general secretary Tony Burke said: "This seems similar to the US system and in our view anything that helps a company struggling turn around over a period of time gets our full support. It would hopefully stop situations where employees are sacked at a moment's notice."

Under current plans, a moratorium would last for an initial three-month period, allowing the company to negotiate terms of a restructure. An extension of this period would be available for more complex negotiations.

A moratorium would prevent creditor winding-up petitions, the appointment of an administrator and commencement of legal proceedings against the company.

Advantages of the moratorium, according to the Insolvency Service, include stopping 'holdout' creditors damaging restructuring plans and providing directors with an incentive to act early in addressing problems.

Firms would need to satisfy a set of eligibility tests and qualifying conditions before a moratorium was introduced and companies that were already failing, insolvent or had a winding-up order against them could not apply.

Directors would also have to demonstrate that there was a reasonable prospect that a compromise or arrangement can be agreed with creditors and that it has sufficient funds to continue.

Creditors could object to the moratorium at a court hearing, at which, if the court was not satisfied that the company was eligible, a moratorium would be denied.

Responses to the proposal should be sent to The Insolvency Service via post, the address can be found at www.insolvency.gov.uk, or by email to policy.unit@insolvency.gsi.gov.uk.