The Corporate Insolvency and Governance Act 2020 has now come into force, having received Royal Assent on 26 June 2020.
What does this mean?
This Act introduces a new option for any business that is experiencing cashflow problems due to the COVID-19 crisis. It is designed to give a viable business some breathing space to get through these difficult times and come out the other side when the economy improves.
A key provision of the Act is a new ‘debtor in possession’ Moratorium procedure – as opposed to the previous ‘creditor in possession’ – which gives a business 20 business days’ protection from certain creditor action, with a monitor overseeing the moratorium, but leaving the existing management to run the company’s day-to-day business.
The monitor must be a Licensed Insolvency Practitioner, but it is the company director(s) who remain in charge of the business.
This is great news as a common complaint of the previous rules was that it was the bank who was in charge and their focus was often perceived to be on recovering their money, rather than the longer-term aim of helping the business to recover. Also, whenever it was required, the banks would appoint their chosen Insolvency Practitioner whose statutory objective was to maximise realisations, not to rescue the business. Now, the directors will be able to choose which Insolvency Practitioner they want to appoint, but the Insolvency Practitioner will only be responsible for checking that the company is eligible for the moratorium and is likely to be rescued as a going concern. The day-to-day management of the business remains with the directors.
After day 15 of the initial period, if the directors still need time to formulate a turnaround plan, they can extend the moratorium period by a further 20 business days, without having to get the approval of creditors. Any further extension would need the approval of the creditors or the Court. The moratorium can be extended up to a year with creditor support or by Court order. This means it can act as a vital lifeline for a business which is struggling as a result of the COVID-19 crisis, providing enough breathing space for the shape of the post-pandemic recovery to become apparent and the company’s long-term survival to be secured.
The Act also provides temporary relief (currently until 30 September 2020, but potentially extendable by further legislation) from being subject to a winding up petition and from wrongful trading provisions where a business can demonstrate that its difficulties have arisen due to the COVID-19 pandemic.
Bob Pinder, director at the ICAEW, said:
“This Act contains both short-term measures and long-term reforms, and our licensed insolvency practitioners will have a key role to play as the changes take effect.
“Our licensed insolvency practitioners are responsible professionals who are committed to helping companies restructure and survive where possible, and they will take every step necessary to ensure the legislation works in the best possible interests of all stakeholders.
“This legislation has been designed to save businesses and jobs, and we hope it’s a success.”
John Bell, the senior partner at Clarke Bell, said:
“This is very welcome news. Businesses need all the help they can get, and this piece of legislation is ideal for aiding the rescue of strong companies who have been knocked off balance by the crisis and only require a Time to Pay Arrangement with their creditors, coupled with further working capital finance in order to make it through. And finance can still be obtained for strong companies, even in a Company Voluntary Arrangement.
“It will not save the ‘zombie’ companies, however, who are only surviving because of low interest rates and financial support from the Government. They are unlikely to survive – and, arguably, should not be encouraged to survive. A better option for those companies would be to liquidate now, before they put any more resources and money into a company that isn’t going to get through this economic crisis.
“Accountants will play a key role in these ‘light touch rescue plans’ to help any of their clients who basically have a sound business but need some breathing space to get through this crisis. Options like a Time to Pay Arrangement or even a formal Company Voluntary Arrangement could also result in a significant reduction of the total debt that is paid back.”
For more information, contact John Bell directly on email@example.com or 0161 907 4044.