“The sudden beginning of the pandemic and the imposition of the first lockdown brought about an economic scenario we've never seen before,” Paul Bannister, Head of Policy at The Insolvency Service, told ICAEW Insights. “It was obvious very quickly that the government had to bring in some extraordinary measures that it had never done before.”
The swift spread of the virus needed to be matched by rapid government action - more specifically in the Insolvency Service’s case, the Corporate Insolvency & Governance Act 2020. “It would normally take an act of that size about a year and a half to both develop and get through the parliamentary process,” he said. “We were given 12 weeks”. The act had two distinct sets of measures: permanent and temporary.
Corporate Insolvency & Governance Act 2020
The permanent measures, the restructuring package, has two individual parts to it: the company moratorium and the restructuring plan.
“The idea was that the moratorium would give companies 20 days of breathing space from their creditors, whilst they could attempt to try and find a rescue out of their immediate financial problems,” said Bannister. “The restructuring plan, which was the second part of the restructuring package, was a flexible tool to allow companies to restructure their debts.”
Bannister explained that the restructuring plan had a novel aspect to it called Cross Class Cram Down (CCCD), which basically allowed the dissenting classes of creditors to be crammed down on their debt, even if they disagreed - often a major issue in restructuring. Before this act, many rescue procedures couldn't get through because of it.
The two principal temporary measures were the relaxation of wrongful trading and the restriction of winding-up companies. Bannister said wrongful trading is a deterrent measure that is there to protect creditors from directors who will continue to trade even if their company is clearly insolvent.
“However, this proved to be an immediate problem at the onset of the first lockdown because it became clear many companies could be technically insolvent because they were unable to trade. And we were concerned that they would have to put their business into insolvency despite being essentially viable, but just in these very unusual circumstances, so we had to act quickly on this”, he said.
The restriction on winding-up companies was essentially brought in to support another measure implemented by the Community Secretary that restricts evictions by commercial landlords of their commercial tenants due to non-payment of rent because of the lockdown restrictions. What The Insolvency Service found was that commercial landlords were seeking to wind up companies as another way to enforce their debt, therefore they had to act on this quickly, making sure that this particular temporary measure could stretch across the economy.
This suite of measures, both permanent and temporary, have now been in place since the end of June last year (although the relaxation of wrongful trading was put in place from the beginning of the pandemic) and have all been extended three times; they are currently due to expire at the end of June.
‘Of particular interest to ICAEW members’
According to Bannister, the other thing of ‘particular interest to ICAEW members’ is the moratorium that requires a monitor who must be a registered Insolvency Practitioner (IP).
The Insolvency Service encourages IPs to take up monitor appointments when they come up, and they’ve tried to keep a keen eye on things to make sure the system is running smoothly.
“We'll be watching the take-up by IPs to become monitors very closely and whether there are any impediments to doing so,” he said. “And we're always open to hearing views of IPs who may find that they've taken an appointment, and it's either worked well, or there have been issues that haven't worked. And if necessary, we'll make some urgent changes as a result.”
‘It's time for the economy to stand on its own again’
Despite the recent delay to the easing of lockdown, many businesses are now beginning to operate in something resembling normal conditions. However, Bannister believes there are several hurdles to clear before the economy can begin functioning close to its pre-COVID capacity again. For example, how the government’s four-step roadmap works, the vaccine rollout and how businesses bounce back after being unable to trade for sometimes more than a year. According to Bannister, these firms are likely to need some form of continued support. “I think what’s pleasing is that companies with even the most complex forms of debt arrangements have been able to restructure using these tools so far,'' he said.
“It’s also fair to say that the temporary measures have done their job”, added Bannister. “The number of company wind-ups have reduced drastically as a result of these measures, protecting many thousands of businesses, jobs and vital investment. There’s demonstrable evidence that these measures have avoided a big spike of insolvencies. But the key is what happens once all these measures finally expire, and it's time for the economy to stand on its own again.”
ICAEW is the largest insolvency regulator in the UK. We offer the opportunity for ICAEW chartered accountants and non-ICAEW members to qualify and be licensed as insolvency practitioners with us. To find out more visit: https://www.icaew.com/regulation/insolvency
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