In brief

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Happy New Year and welcome to the first AdvisoryMatters of 2023.  After an extremely volatile 2022, who knows what this year will bring. But I suspect that everyone involved with the restructuring and insolvency profession will be busier than before.

So here are a few snippets which may be of interest, especially to lenders.

Defaulting borrowers

Rising interest rates mean that the cost of borrowing increases, and that will inevitably lead to more borrowers defaulting.

Lenders need to carefully manage their portfolios and aim to quickly establish a dialogue with defaulting borrowers. Then they can work out what options are available to them, and whether they should support the borrower or if they need to take steps to enforce their security. Non-co-operation by the borrower inevitably narrows the available options.

If a lender chooses not to support a customer, it’s best to get an insolvency practitioner involved. They will act as a buffer between the two parties, removing any conflict from the situation. This should reduce the likelihood of the borrower making a claim against the lender. Depending on the type of appointment, practitioners can trade a business, complete a development, instigate litigation and compel directors and others to co-operate with them.  This flexibility enables bespoke solutions to distressed situations.

Energy efficiency squeeze

Energy Performance Certificates are banded at A (most energy efficient) to G (least efficient). Selling or letting a residential property currently requires an EPC rating of at least E. This is set to change from April 2025 when landlords will need a minimum rating of C to enter into a new tenancy. Some 70% of rented properties are rated below this threshold.

For commercial properties, from 1 April 2023 it will be illegal to let a property with a rating below E. It’s thought this will currently affect one in five commercial properties. It is clear what the direction of travel is here, and it’s expected that properties will need to be in bands A or B by 2030. This will obviously have implications for both lenders and borrowers in that sector.

Property ownership transparency

The Register of Overseas Entities was created with effect from 1 August 2022 in an attempt to improve the transparency of property ownership in the UK. Overseas entities with an interest in UK property had to declare their beneficial owners on the register by the end of January 2023. It’s a criminal offence to fail to keep the register properly updated. It applies to any entity governed by non-UK legislation. These entities won’t be able to acquire, charge or sell property unless it is registered.  It’s not thought the restriction on sales will apply to secured lenders enforcing their security. But from 1 August 2022 new security cannot be correctly registered if the property has not been placed on the register.

No ordinary restructuring

PKF GM almost became involved in a restructuring plan with a difference – one that was being proposed by a creditor of the distressed company. Restructuring plans are rare enough, but to have one proposed by a creditor would have been truly ground-breaking. We concluded that any such plan would require either an existing insolvency process (almost certainly a trading administration), or a change of management – and probably of ownership too. The stars would have to align perfectly for such a plan to be approved. What’s more, the court would need to be wholly satisfied that granting the application would be the best option for all stakeholders and/or that no class of stakeholders would be prejudiced.

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