With the Corporate Insolvency and Governance Act becoming law on Friday, businesses have more options to help them through the COVID-19 crisis.
Most notable is a new standalone moratorium option for companies in financial difficulty. The new rules give businesses a minimum of 20 days of protection from certain creditor actions, with an insolvency practitioner acting in the role of monitor.
The company’s directors remain in charge of the business, and are able to extend the moratorium period by a further 20 days if, after day 15 of the initial period, they still need time to formulate a turnaround plan, without the approval of creditors. Any extension beyond 40 days requires creditor approval.
The moratorium puts the focus on company recovery rather than asset realisation, putting it on a footing with Chapter 11 Bankruptcy in the US, Bob Pinder, ICAEW’s Director, Professional Standards, explains. “It’s probably the biggest debtor-friendly piece of legislation that we’ve had in the UK. It does chime with what goes on in the States with Chapter 11 debtor in possession. The directors remain in control.”
The moratorium can be extended up to a year with creditor support, which means it could act as a vital lifeline for businesses that are struggling due to the COVID-19 crisis. On top of the moratorium, the Bill also introduces temporary measures to ease pressure on businesses as they try to find a path through lockdown.
The Act also provides temporary relief until 30 September 2020 from being subject to a winding up petition and from wrongful trading provisions where a business can demonstrate its difficulties arise from trading conditions arising from the COVID-19 pandemic. “Businesses can have the confidence to keep going, knowing that this will pass,” says Pinder. “If they were a solid business before with good cashflow; they should come out the other side.”
While insolvency practitioners need to act as monitor on moratoriums, accountants should familiarise themselves with the measures and outline the options for clients or directors.
“All of these measures are aimed at alleviating pressure on distressed businesses that perhaps weren’t distressed before the crisis hit,” he explains. “A moratorium allows them to continue to trade with a bit of oversight. They can’t take on extra credit without talking to the monitor, or charge any assets, but there are no wolves at the door.”