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Corporate Insolvency Act provides saving grace for businesses


With Covid-19 wreaking havoc on businesses, John Bell reflects on how the Corporate Insolvency and Government Act could be the lifeline to save firms from going under.

29th Jul 2020
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Hardly a day goes by without hearing the news that another business is filing for administration and the floodgates are set to open over the coming months as the real impact of coronavirus takes its toll on the wealth of the nation. 

A lifeline for these businesses could be the Corporate Insolvency and Government Act 2020 which came into effect on 26 June 2020 by Royal Assent.  

What does the Act mean?

For any business that might be experiencing cashflow problems right now in the wake of the pandemic, the Act could give them the breathing space they need to survive and emerge the other side when the economy picks up.

The key difference of the Act includes a new ‘debtor in possession’ moratorium process – compared to the previous ‘creditor in possession’ – which provides a business with 20 business days’ protection from certain creditor action, with a monitor, a licenced insolvency practitioner, overseeing the moratorium but allowing the existing management and company director or directors to run the firm’s day-to-day business.

This is very welcome news indeed as businesses need all the help they can get, and this piece of legislation is ideal for aiding the rescue of strong companies who have been knocked off balance by the crisis and only require a Time to Pay arrangement with their creditors, coupled with further working capital finance in order to make it through. And finance can still be obtained for strong companies, even in a Company Voluntary Arrangement.

I fear that the new Act will still not work to save the ‘zombie’ companies, however, who are only surviving because of low interest rates and financial support from the government. They are unlikely to survive – and, arguably, should not be encouraged to survive. A better option for those companies would be to liquidate now, before they put any more resources and money into a company that isn’t going to get through this economic crisis.

Accountants will play a key role in these ‘light touch rescue plans’ to help any of their clients who basically have a sound business but need some breathing space to get through this crisis. Options like a Time to Pay Arrangement or even a formal Company Voluntary Arrangement could also result in a significant reduction of the total debt that is paid back.

One common complaint of the previous rules was that it was the bank that was in charge whose principal focus was often perceived to be on recovering their money, rather than the longer-term aim of helping the business to recover. Also, whenever it was required, the banks would appoint their chosen insolvency practitioner whose statutory objective was to maximise realisations, not to rescue the business.

Now, the directors will be able to choose which insolvency practitioner they want to appoint, but they will only be responsible for checking that the company is eligible for the moratorium and is likely to be rescued as a going concern.

After day 15 of the initial period, if the directors still need time to formulate a turnaround plan, they can extend the moratorium period by a further 20 business days, without having to get the approval of creditors. Any further extension would need the approval of the creditors or the Court. The moratorium can be extended up to a year with creditor support or by Court order. This means it can act as a vital lifeline for a struggling business, providing enough breathing space for the shape of the post-pandemic recovery to become apparent and the company’s long-term survival to be secured.

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