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A new solution to help businesses through these turbulent times

Thanks to the Corporate Insolvency and Governance Act 2020, companies that have been knocked off balance due to the Covid-19 crisis have been provided with a new solution to help them survive these turbulent times.

The new rules came into effect on 26 June 2020 and are a welcome initiative for helping a strong company get through the considerable problems which are being caused by the coronavirus pandemic.

It is important to note that this procedure is a solution for a strong company, not a so-called ‘zombie’ company. The Government does not want the procedure to be used by a company that has no chance of avoiding failure, as it is not intended to be used merely to postpone going into a formal insolvency procedure. Sometimes it is better to make hard decisions and put a company into administration or liquidation. If you are in that position, we can also help you determine which is your best option.

The type of company that will be helped

These new rules have only just come into effect, so there are some uncertainties about how it will all work out. However, the new rules provide a great deal of hope for a lot of companies. They are intended to help a company which:

  • is having cashflow problems due to the issues caused by the Covid-19 crisis
  • was performing well before Covid-19 struck
  • is built on solid foundations
  • needs some breathing space with paying its bills
  • is likely to prosper when the Covid-19 crisis is over.

The different stages of the new procedure

There are a number of different steps that a company owner will need to go through to make this solution work for them, as detailed below.

1. Moratorium

A key provision of the Act is a new ‘debtor in possession’ Moratorium procedure which gives a business 20 business days’ protection from certain creditor action. (This is as opposed to the previous ‘creditor in possession’).

A ‘monitor’ will need to oversee the moratorium, but they will leave the existing management to run the company’s day-to-day business. The monitor’s role is to support the integrity of the moratorium process and ensure that the creditors’ interests are protected. The monitor requires directors to provide any information they need to carry out their functions and will exercise their professional judgement to satisfy themselves of the accuracy of the information provided by the directors – and can ask for further information, as and when they require it. If directors do not comply, the monitor can file a notice at court to bring the moratorium to an end. 

The monitor must be a Licenced Insolvency Practitioner. However, it is the company directors who will be in charge of the business. The main benefit of this is that, under the previous rules, it was the bank who was in charge; and their focus often seemed to be to recover 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. 

Under these new rules, the directors will be able to choose which Insolvency Practitioner they want to appoint – although 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.

During the moratorium period certain conditions apply, including:

• no petition can be presented for the winding up of the company
• no order may be made for the winding up of the company
• no administration application may be made in respect of the company

…except by the directors of the company (in which case, they must notify the monitor).

The full guidance from the Government on how to apply for breathing space to work out a rescue plan for your company under these new rules can be found here.

2. Getting new finance for your company

If it is needed, Clarke Bell can help directors get new finance and remove the existing funder of the business. This means that you will have a lender with a real appetite to help your company move forward, providing you with the working capital you need.

The funders we use have a diverse portfolio of clients, so we will make sure that you are working one that is best suited to help you.

3. Company Voluntary Arrangement (CVA)

The main aim of the moratorium is to help rescue the company, keep it trading and get it making profits. This could be via a new restructuring plan; or just an injection of new funds into the business; or with a Company Voluntary Arrangement.

When a CVA is the best option, Clarke Bell will work with you and your accountant to prepare a realistic and workable CVA proposal. We would act as the Nominee of the proposed CVA and, if it is approved by the requisite number of company creditors, we would then act as the Supervisor for the duration of the CVA (which is typically 5 years but, in some circumstances, can be 12 months).

In the CVA, all the company’s pre-CVA debts are put into a “pool” and repaid from monthly contributions. The company continues to trade, although it does need to let third parties (e.g. suppliers and customers) know that the company is in a formal CVA. However, this is unlikely to be a problem with your well-established relationships with third parties. 

As the Supervisor of your CVA, Clarke Bell will closely monitor that the company is sticking to the terms of the CVA. If the company finds that it can’t meet the monthly payment terms set out in the CVA, it may be that another insolvency option will need to be taken – e.g. liquidation or administration. We will work with the company directors and their Accountant to ensure the right option is taken to ensure that the directors are fulfilling all their legal obligations.

4. “Light touch debtor in possession” recovery

With all the uncertainties surrounding the Covid-19 crisis and how long it is going to last, there are no guarantees of success with this new procedure. However, these new rules will give a lifeline to a lot of companies to make a full recovery – companies who would otherwise not survive.

How much will it cost?

Depending on the particular case, the role of the Insolvency Practitioner could be a combination of monitor, introducer to new funders and Nominee & Supervisor of the CVA.

As a result, the cost we would charge is agreed on a case-by-case basis.

However, you can be assured that our fees will be affordable.

Will this work for any company having problems due to Covid-19?

This is not the right option for every situation.

For a company that is really struggling with its cashflow and debt problems, the better option is likely to be to put the company into Administration or Liquidation – more information can be found here.

Then, if the business owner wants to re-start their business with a new company, we can help them find the necessary funds to successfully achieve this.

Want to know more?

We will not charge you for our initial consultation. Any fees subsequently charged will depend on the solution you choose and will only apply once properly authorised. Our advice is confidential.

So, if you’d like to discuss the options which are available to your company, contact Clarke Bell now on [email protected] or 0161 907 4044.



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