The Difficulties with 'Financial Difficulties': The Threshold Conditions for the New Part 26A Process

(2020) 35(10) Journal of International Banking & Financial Law 662 (November 2020)

3 Pages Posted: 30 Sep 2020 Last revised: 30 Nov 2020

See all articles by Riz Mokal

Riz Mokal

South Square Chambers; University College London (UCL) - Faculty of Laws

Date Written: September 19, 2020

Abstract

The new arrangements and reconstructions mechanism included in the Companies Act 2006 as Part 26A by the Corporate Insolvency and Governance Act 2020 is a welcome addition to the restructuring toolkit available in the UK. On any view, it will add powerfully to the ability of restructuring professionals to assist distressed debtors and their stakeholders.

Unfortunately, the threshold requirements that the debtor company be in “financial difficulties” affecting “its ability to carry on business as a going concern”, and that the plan it proposes should address these difficulties or their effect, are deeply confused and themselves likely to create difficulties.

In particular, financial difficulties may be exacerbated rather than mitigated by the carrying on of the business as a going concern. Further, even if the business ought to continue as a going concern, the company may best address its financial difficulties by disposing of instead of carrying on that business. Worst, a company may burn cash for a significant time, thereby sinking ever deeper into balance sheet insolvency, without encountering financial difficulties which would affect its ability to carry on business as a going concern.

This article highlights the key problems and shows how they arise, why they are unnecessary, and how they might be fixed.

Keywords: Scheme of arrangement, cross-class cram down

JEL Classification: K20, K22, G33

Suggested Citation

Mokal, Riz, The Difficulties with 'Financial Difficulties': The Threshold Conditions for the New Part 26A Process (September 19, 2020). (2020) 35(10) Journal of International Banking & Financial Law 662 (November 2020) , Available at SSRN: https://ssrn.com/abstract=3695545 or http://dx.doi.org/10.2139/ssrn.3695545

Riz Mokal (Contact Author)

South Square Chambers ( email )

3-4 South Square
Gray's Inn
London, WC1R 5HP
United Kingdom

HOME PAGE: http://southsquare.com/barristers/riz-mokal/

University College London (UCL) - Faculty of Laws ( email )

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London WC1E OEG, WC1E 6BT
United Kingdom
+44 - (0)20 - 7679 1406 (Phone)
+44 - (0)20 - 7679 1461 (Fax)

HOME PAGE: http://www.ucl.ac.uk/laws/

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