Court filings: when early disclosure puts restructuring at risk

Many years ago, I lived and worked in Hong Kong. As a former colony of the British Empire, the insolvency legislation in Hong Kong was based on UK legislation and in particular, early versions of the Companies Act. This meant company restructurings were typically quite legal heavy assignments with regular interaction with the court, taking longer to achieve. As one lawyer said to me, it is quicker to turnaround an ocean liner than it is to turnaround a business in Hong Kong – an exaggeration, but a point well-made.

Here in the UK, the insolvency legislation has evolved over the years. The Enterprise Act 2002 was introduced to reform the UK’s insolvency regime and to make provision relating to the promotion of enterprise and economic growth. With a nod towards the USA, entrepreneurship was encouraged whilst creditors could be assured that the conduct of errant directors would still be punished. Underpinning the legislation, an ethos that company restructurings can be implemented expediently.

Court filings and the speed of disclosure

The government is always looking to improve how business is conducted in the UK and one such area they may want to consider is the filing at court of winding-up petitions and notice of intention to appoint administrators (‘NOI’). My concern is that this information is now immediately available to absolutely anyone, which can then make the satisfaction of a debt or an orderly restructuring of a business, sometimes more difficult and occasionally all but impossible.  

When a creditor issues a winding-up petition, it is initially filed at court and then served on the company’s registered office. The date for the winding-up hearing is usually around 8 weeks after the petition was initially filed at court. The petition itself is only advertised in the London Gazette no later than 7 days prior to the winding-up hearing. Only when the petition is advertised, is it deemed to be notice to the world of its existence.

A NOI is filed at court and then served on the company and any debenture holders, but there is no requirement to advertise. The filing of the NOI triggers a moratorium which delivers immediate protection from creditor action and is usually the first step in a more formal restructuring or sale of the business. 

In recent years, a practice has developed whereby any winding-up petition and NOI filed at court is immediately captured by commercial search agents who run live court checks and then circulate these details to list subscribers. Notwithstanding the fact that these court filings are not advertised, knowledge of their existence is therefore immediately available to anyone who cares to know. This has led to some interesting developments.

The consequences for companies and creditors

Before the winding-up petition has even been served, an unsuspecting company director will typically be contacted by a search agent advising of the existence of the winding-up petition, together with an offer of assistance to solve the problem, only of course, after payment of the agents’ fees. I’ve lost count of the number of times that this ‘helpful and urgent service’ has failed to deliver the best outcome for the director and the wider body of creditors. 

Banks will normally only freeze the company bank account once the petition has been advertised. However, some lenders will take a different view and restrict funding as soon as they are aware of the petition. This action can cause significant cash flow issues for a company, just at the time when funding is most required.

Prior to a NOI being filed, the proposed administrator should have discussed matters with key creditors, including debenture holders, whose ongoing support is deemed essential to achieve a successful sale and restructuring of the business. However, the nature and timing of the assignment sometimes means you can’t speak to everyone, and we have seen instances where trade credit and insurance providers, who usually receive immediate notification of NOIs, choose to reduce a company’s credit rating with obvious consequences to ongoing trade.  

Preserving value in a connected world

The legislation relating to court filings is hardly extensive and was enacted in a different era when the internet never existed, never mind AI. We are now operating in a modern and connected business environment where information can be accessed and shared immediately all around the world. 

As restructuring professionals, our main role is to deliver the best financial outcome for creditors, which will mean preserving the value in a company’s assets and its goodwill. We need to be able to deal with matters in a swift and discreet manner and rarely does it help for the client’s financial problems to immediately become public knowledge.

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