The Corporate Insolvency and Governance Act, which includes the biggest changes to the restructuring and insolvency framework in a generation, has recently been introduced as part of the Government’s response to the Covid-19 pandemic.
The new reforms are intended to minimise the financial damage caused to struggling companies, their creditors and employees, and to help restore them to financial health.
The centrepiece of the reforms is a new standalone moratorium which creates a short-term breathing space for distressed businesses which protects them from creditor action while they work on a rescue plan to save the company as a going concern.
For the first time in UK law, the concept of a “debtor in possession” has been created which allows the directors to retain control of the company, subject to the oversight of a licensed insolvency practitioner who provides a “check and balance” against the inappropriate use of the new procedure.
The logic here is that, by enabling the directors of a distressed company to remain (with appropriate safeguards) in day-to-day control, they will be more likely to seek professional help at a point when the company is still capable of being saved, rather waiting until it is too late and see the company slide into administration or even liquidation.
The new moratorium, which lasts for an initial period of 20 business days, may be particularly useful where a fundamentally sound company has suffered a bad debt caused by the failure of a customer which, as often happens, has put pressure on its liquidity and it therefore needs time to put things right.
Another possible use could be when a company needs time to complete a refinance of its borrowings, or for an injection of new equity or loan finance to facilitate ongoing trading.
The moratorium is a free-standing procedure, meaning that it is not necessarily tied to any particular outcome.
In the simplest cases, the company’s immediate problems will be resolved, the creditors who were made subject to the resulting “payment holiday” are paid, the moratorium comes to an end and the company resumes normal trading – in short, everyone’s happy.
The moratorium can be extended up to forty business days (and thereafter with the consent of its creditors or the Court), but if the company needs longer than this to restructure its debts and require creditor compromises to be able to return to financial health, further actions may be required.
A company voluntary arrangement (CVA) may be proposed to the members and creditors of the company, or in the most complex and high value cases, a restructuring plan, which is another new procedure introduced in the new Act.
While creditors may be unhappy at their debts not being paid when due, their losses would likely be much greater if the company could not be saved – and might even be everything they were owed.
The new Act also brings in a number of temporary measures which are currently intended to last until the end of September 2020 and which aim to alleviate company collapses caused as a consequence of the COVID-19 pandemic, including:
Overall, these reforms will have a long-lasting effect on the restructuring and insolvency framework for distressed companies, which will be felt long after Covid-19 is just an unpleasant memory.
They will take some getting used to, but there are now more options and a greater imperative than ever before for the directors of a distressed company to take early decisive action which enables them to stay in control whilst they work to save their businesses and livelihoods.
For further information please contact Neil Harrold, Head of Restructuring and Insolvency at Hay & Kilner Law Firm at firstname.lastname@example.org