May 22nd, 2020 / Insight posted in Articles, Operations

New insolvency laws will help struggling businesses

On 20 May, the Corporate Insolvency and Governance Bill 2020 was laid before parliament. This will, when enacted into law, be a very substantial change to Insolvency Law and will provide some much needed assistance to businesses struggling in the Coronavirus crisis. It is hoped the new measures will be in place at some point in July.

The law reform is intended to give far more flexibility for businesses to quickly obtain protection from creditors without the need to formally appoint an insolvency practitioner as administrator thus losing control over management of the business and incurring large fees to the detriment of creditors.

Here, we summarise the main points of what the new law will bring:

  • A four-week moratorium for businesses that need one – primarily for those that are insolvent or likely to become so. In essence, this means protection from their creditors so that they have time to put in place a restructuring plan to avoid formal insolvency.

Restructuring can take many forms, such as debt to equity swaps, additional finance and write-down among other solutions that creditors may agree. The moratorium will need to be overseen at relatively low cost by a monitor, who must be a licensed insolvency practitioner. It is expected that the same practitioner would then be conflicted from accepting any future formal appointment, should that need arise.

The four-week moratorium can be extended in certain circumstances but it is intended as an intermediate process. Courts are not expected to allow several extensions in the absence of a successful restructuring process in the short term.

  • A protection of supply, so that certain processes are put in place to ensure that key supplies are not restricted when the business needs them most. There will be caveats and protections here of course. It would cause disruption if supply was stopped from those owed money when the moratorium kicks in. Checks and balances will be put in place to ensure ongoing supply is paid for, even if arrears are held at bay.
  • Suspension of wrongful trading until 31 May. Directors will still need to tread carefully regarding other claims and liabilities after 31 May. It is understood this relaxation will not be extended beyond this date.
  • Restrictions on the ability to present winding-up petitions and for orders to be made.
  • Other minor reforms include: giving the Secretary of State additional powers to amend insolvency law to mitigate the effect of the pandemic; and changes to company law to ease the requirement to hold timely meetings because of practicalities arising from the Coronavirus crisis.

Time will tell whether the process will be successful, not just in dealing with the current crisis but going forward in dealing with ‘normal’ financial distress. To judge this moratorium on the Coronavirus crisis alone would be unfair.

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