University of Nottingham Commercial Law Centre

UNCLC Seminar on Public Credit Guarantee Schemes and Insolvency Regulation – The United Kingdom’s regime, Blog by Hwee Er Teo, UNCLC research assistant

Small and Medium-sized Enterprises (SMEs) form the backbone of many economies around the world. The definition of a SME varies, but the main distinguishing factors determining whether an enterprise is a SME include the staff headcount, turnover or balance sheet total (European Commission, Internal Market, Industry, Entrepreneurship and SMEs). According to the World Bank, SMEs represent about 90% of businesses and 50% of employment worldwide. They also contribute up to 40% of national income (GDP) in emerging nations (World Bank, World Bank SME Finance: Development news, research, data). However, despite their importance, SMEs often face financial challenges, particularly in terms of access to credit and managing risks in times of financial distress.

In the recent University of Nottingham Commercial Law Centre Seminar, “The cross-impact of public credit guarantee schemes and the insolvency regulation applicable to small enterprises”, Dr Juan L. Goldenberg, a visiting scholar from the Pontifical Catholic University of Chile, discussed the challenges faced by SMEs in accessing credit, and highlighted how the use of public guarantee schemes such as the “Fondo de Garantía para Pequeños Empresarios” (FOGAPE), could be useful or problematic in different contexts. Dr Goldenberg also shed light on the recent amendment made to the Chilean Insolvency Act in 2023 and its implications for SMEs. It was concluded that despite the reforms introduced in Chile, it is clear that more needs to be done to support SMEs in navigating insolvency proceedings.

Dr Sandra Frisby, the Associate Professor in Company and Commercial Law at the University of Nottingham, was the discussant for the seminar. Dr Frisby made some insightful observations in response to Dr Goldenberg’s sharing. In particular, she highlighted the similarity between Chile and the UK in terms of their dependence on SMEs in their economies. Given this premise, Dr Frisby argued that it would have been expected that policy developments in this area would take into account the position of the SMEs. Yet, she noted that this has not always been the case. Dr Frisby referred to the UK’s 1996 Company Law Review Steering Group’s consultation, and the Commission’s “Think Small First” campaign which aimed at simplifying the operating environment for SMEs. However, it was noted that the Steering Group ended up doing precisely the opposite, paying little attention to smaller companies, their exigencies, and financial requirements. Dr Frisby suggested that this is an issue that requires attention and will need to be addressed in the future.

In terms of financing outside of public backed guarantees, Dr Frisby pointed out how SMEs in the UK face the same problems as in Chile. When approaching a financial institution, it can be challenging for a small company to demonstrate any form of collateral. This is particularly problematic for unincorporated organisations, as it can be difficult for them to separate the sole trader’s personal assets from the business assets. In general, a separation will only take place if the small trading enters into bankruptcy, at which point the business assets will be delineated. It should theoretically become easier for the financial institutions at this stage, as they will be able to take a floating charge over the assets that are available to the company.

However, whether or not collateral is available, the experience of SMEs is that banks will still insist on personal guarantees being provided, either by directors, owners, managers, or for it to be backed up by real security over a family home. This forces companies to take a tripartite route of using collateral, executing a guarantee, and backing it up with a mortgage in order to secure financing. While this approach may make financing less risky, it can place a significant burden on business owners personally. Dr Frisby went on to explain that SMEs therefore often turn to receivables financing as an alternative. This is a flexible form of finance that assigns debts to secure financing. However, this type of financing can become problematic if the company faces financial difficulties, and the exit route for the financier is often expensive. In all, it was suggested that financing for SMEs in the UK will always be a challenge just like in Chile.

In response to the general position of reorganising SMEs in the UK, Dr Frisby reiterated how the UK’s regime detracted from the “Think Small” campaign. She argued that the Corporate Insolvency Governance Act 2020 remains to be primarily aimed at larger restructuring projects. Dr Frisby also explained the moratorium, which is an arbitral procedure that has not been frequently used, and mentioned how the restructuring scheme can be too expensive, involving too much court time and sanction. In fact, this scheme is similar in certain respects to a Chapter 11 Reorganisation Scheme and offers the possibility of sanctioning by the creditors themselves. Dr Frisby also discussed that one idea that has not been enacted is “super priority”, even in relation to the largest companies. She believes that the reason for this is that big financial institutions themselves would be troubled by the potential for secret priority items in relation to small companies.

Furthermore, Dr Frisby believes that the enactment of the “Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021”, which effectively cuts off the pre-pack route for small companies, has made reorganisation procedures more difficult. A pre-pack business is when an insolvency practitioner negotiates a deal prior to entering into insolvency, and that deal is executed immediately after insolvency. This deal often involves the company's existing owner managers buying back the business as a going concern. While this remains an option, it has been made much more difficult in 2021 by the enactment of the new statutory instrument, which requires a qualified report from an independent evaluator that the deal is reasonable.

Dr Frisby acknowledged that some pre-packs arrangements have a strong and potentially overwhelming impact on involved parties, but argued that the timing of the new statutory instrument was unfortunate, as pre-packs would have been an extraordinarily useful form of reorganisation for businesses hit by the pandemic. She added that from what she could gather, there are still pre-packs going on in these circumstances, but what has been seen is a resolution to liquidation at much higher levels.

In a nutshell, Dr Frisby’s commentary offers valuable insight and reflection on the UK’s regime on public credit guarantee schemes and insolvency regulation. It is apparent that SMEs in the UK encounter similar challenges as SMEs in Chile in terms of financing and insolvency proceedings. In reality, however, this is not unique to the UK and Chile. Studies done by the Organisation for Economic Cooperation and Development (OECD), as well as Asian Development Bank (ADB) indicate that SMEs across Europe and Asia are also grappling with similar issues. It is, therefore, imperative that governments, financial institutions, and other stakeholders work together to create a more enabling environment for SMEs.

University of Nottingham Commercial Law Centre

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