Corporate Insolvency and Governance Act provides breathing space to businesses left struggling by the Covid-19 pandemic

Sam Pedley

As part of his firm’s latest advice on the topic, Sam Pedley, a partner and award-winning insolvency expert at mfg Solicitors, runs through the main changes and the delicate balancing act of helping businesses to survive.

The Corporate Insolvency and Governance Act 2020 brings into effect the most significant changes to UK insolvency law in a generation.

The fact that the Government got the Act through Parliament in just six weeks shows how important it considers the new law to be in getting businesses back on their feet.

Last year it had a rapid passage through the UK parliamentary process, making its way from first publication on 20 May to Royal assent on 25 June.

In short, the Act is there to encourage businesses to carry on trading or to stop creditors from taking enforcement action while there’s still a chance that they can get things going again as we move out of the phase of damaging lockdowns.

There is also a temporary suspension of the wrongful trading regime, which means a director will be assumed not to be responsible for the financial position of the company getting worse at this time. Directors still have to abide by all their other duties however.

Suppliers have also been permanently banned from halting supplies because of their customer’s insolvency. Even if the customer hasn’t paid them for previous orders, they have to carry on supplying them if there is a rescue plan or restructuring in place. That’s good news for struggling customers but a huge headache for their suppliers, who will need to look carefully at their contracts and make sure it’s set out that they can terminate on early signs of distress if they want to protect their own products and services.

There’s also a 20 working day moratorium on insolvency processes – extendable by anything up to a year or more – placing companies on payment holidays to give them time to sort things out, while new restructuring plans will require creditors and shareholders to vote on the rescue option and it can be backed by a court order if any of them disagree.

All of this is intended to give businesses space to recover, time to adjust to the challenges of trading, and ensure they aren’t cut off by their suppliers.

For those they owe money to, however, the measures bring new challenges as they too will want to protect their own businesses, staff and income. For creditors, spotting the potential warning signs early and then ensuring their contracts have clauses that will stop them from being dragged under by a struggling customer will be vital.

Overall, this Act provides very useful additions to the restructuring toolkit and welcome relief for distressed businesses. However, given the speed with which the Act was passed, and the complexity of the legislation, there are undoubtedly areas of ambiguity and potential challenge.

Businesses here in the West Midlands should ensure advice and assistance is taken at the earliest opportunity.

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