The Corporate Insolvency and Governance bill, which includes a number of new measures to assist businesses that are struggling financially in the wake of the Covid-19 Pandemic, received royal assent on the 25th June 2020.
The legislation seeks to maximise the survival rates of financially distressed businesses, help safeguard jobs and support economic recovery.
The passing of The Corporate Insolvency and Governance Act 2020 means Insolvency Practitioners now have more tools available to them to give distressed businesses the best chance of recovery including the much-anticipated Moratorium and Restructuring Plan.
The provision of a Moratorium seeks to assist financially distressed but viable business, by providing formal breathing space to pursue a rescue or restructuring plan. Under a moratorium a company will be overseen by a ‘Monitor’, an Insolvency practitioner. The initial period for a moratorium is 20 days, with the provision for approved extensions. During such time no legal action can be taken unless by leave of Court, there can be no disposal of assets unless by approval of the Monitor. The Monitor must also remain of the professional opinion that any plan will result in rescue.
A restructuring plan involves directors putting together, perhaps with their external advisors, a realistic and credible plan for turning the business round. In the event that such a plan is deemed to be realistic, viable and achievable, a Court can bind all classes of creditors to accept the proposed restructuring plan if it is deemed to be fair and equitable and in the interest of the creditors.
Suspension of wrongful trading due to the effects of Covid-19
The temporary measures introduced by the Act, including removing the threat of a director’s personal liability for wrongful trading because of any worsening of their company’s financial position occurring due to the effects of Covid-19, will now apply until 30 September 2020.
The measure introduced by the Bill means that if such an application is made by a liquidator or administrator, the Court is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the Coronavirus pandemic.
Whilst the changes may be welcomed by company directors, they should still exercise caution. This is not a blanket suspension of the wrongful trading rules. Neither does it do anything to relax a director’s other statutory or common law duties. Directors concerned for their company’s financial position at this time, just as at any other, would be wise to seek independent advice and to act upon it to minimise any risks they may face.
In a recent special edition of The Streets Sessions, our business podcast, with guest Insolvency expert Liam Cotter, Director of Kingsbridge Corporate Solutions, we discussed the changes to the Corporate Insolvency and Governance Bill aimed at supporting businesses in these challenging times. During the recording we also explored how business owners may manage financial distress in light of market uncertainty. To listen to this special edition of The Streets Sessions please click here