The Corporate Insolvency and Governance Act 2020 – protection for businesses in financial distress
The Corporate Insolvency and Governance Act 2020 received Royal Assent and came into force from 26 June 2020.
Central to this new legislation is a new moratorium which will give a company in financial distress a 20 business day breathing space from creditor enforcement action which can be extended. This new moratorium gives protection to businesses that may be financially struggling and may result in the rescue of the company as a going concern.
The moratorium is intended to be a “light touch procedure” which is overseen by a monitor who must be a licensed insolvency practitioner.
There’s no doubt that the Insolvency Service and the Government have pulled out all the stops to introduce major new legislation affecting the restructuring landscape for UK companies. This Act creates the largest change to our corporate insolvency regime in more than 20 years.
What impact may the moratorium have on the business world?
- The new moratorium gives protection to businesses from creditors and may save viable businesses which are struggling financially.
- Saving viable businesses that right now are struggling would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium).
What action can be taken against a company in moratorium?
Legal and enforcements action against a company in moratorium is extremely restricted. Without permission of the Court:
- A landlord cannot forfeit a lease or re-enter property
- No steps can be taken by a creditor to enforce security
- HP Creditors cannot repossess goods
- Legal processes for debt recovery cannot proceed (except employment claims)
- Floating Charge holders cannot crystallise their charges
Supplying goods and services to a company in moratorium
When a company enters an insolvency or restructuring procedure, suppliers of goods and services will often either stop or threaten to stop supplying the company. The supply contract often gives them the right to do this, but it can jeopardise attempts to rescue the business. The Bill will mean suppliers will not be able to use contractual terms to jeopardise a rescue in this way.
Any goods or services supplied in the moratorium period should be paid for and will be a priority debt to be paid if the company in moratorium fails.
The Role of the Monitor
A monitor must be a licensed insolvency practitioner and will only consent to take office as monitor if a company can demonstrate that the moratorium will result in the survival of the company as a going concern.
They are required to bring the moratorium to an end as soon as it becomes clear that this purpose cannot be achieved.
Responsibilities of Directors
The Bill introduces key offences in relation to the duties of directors (including shadow directors) of companies that enter into a moratorium.
They must supply information on request to the monitor, to satisfy the test that survival as a going concern can be achieved and the monitor must submit a report on the conduct of the Directors as part of this process.
Directors commit an offence of Fraud in Anticipation of a moratorium if they:
- Conceal assets with a value over £500
- Conceal debt due of over £500
- Fraudulently remove assets to the value of £500 and above
- Make false representations to the monitor to secure consent for them to act
If you or a business in your supply chain has entered, or is considering entering a moratorium and you would like to discuss your options further, please get in touch with Nicola Clark or Mark Getliffe of our Restructuring and Insolvency Team.