On Friday 26th June, the Corporate Insolvency and Governance Act 2020 came into effect and represents yet another vital lifeline for businesses navigating the COVID-19 crisis.
Most notably, there’s a new rule which gives firms a minimum of 20 days protection from specific creditor actions. In addition, it provides them with an insolvency practitioner who will monitor the situation.
This is designed to prevent significant numbers of company insolvencies and will provide much-needed support for many.
How will this work in practice?
If you’ve hit significantly hard times during the pandemic, you’re not alone. You may have creditors knocking at your door in desperate need of funds themselves.
The new moratorium will offer a vital cushion while you plan how to settle the bill with your creditors. Most importantly, it means you and your follow directors can remain in control of the business while you do so.
What’s more, if you need longer than the initial 20 days, you can extend the moratorium by an additional 20 days without approval of the creditors. Need to go further than that? You may be able to, but an extension beyond 40 days will need creditor approval.
I’m in real trouble, though
For some businesses, even 40 days won’t be enough to shore up cash flow and devise a plan to emerge from this situation firing on all cylinders.
The good news is that the moratorium can actually be extended for up to a year, if you can gain creditor support.
This will require a firm ‘we’re all in this together’ mindset, but given the extraordinary situation we find ourselves in at the moment, there’s a good chance your creditor will work with you on this. Remember – they have access to the new rules, too.
The new bill also introduces some temporary measures designed to ease pressure on businesses as they work on a recovery plan. For instance, winding up petitions are to be halted until 30th September.
In addition, if you can demonstrate that the difficulties you’re facing related directly to the COVID-19 crisis, you’ll gain protection from any claim of wrongful trading provision.
How do I know if I’m eligible?
There are thankfully very few rules for the moratorium, and those which do exist are fair.
Your company will be eligible if:
- you’re incorporated under the Companies Act 2006 or have unregistered but may be wound up under the Insolvency Act 1986 (even if you’re based overseas);
- the directors are in agreement that the company is unlikely to be able to repay its debts; and
- the insolvency practitioner believes the moratorium will reduce the chances of your company failing.
If you’re eligible, you’ll benefit from lots of peace of mind, including:
- the inability for your landlord to exercise the right of forfeiture or irritancy;
- no enforcement of security;
- no repossession of goods; and
- no legal proceedings or legal processes against your company.
The moratorium is entirely different from going into administration, because there’s no provision for the practitioner to grant consent on any of the above.
This doesn’t mean the moratorium is bullet-proof. For instance, because financial debts are classed as pre-moratorium debts without a payment holiday, lenders who don’t support the new bill may may able to bring it to an end.
But if you were running a solid business before COVID-19, the new corporate insolvency bill is designed to help you pave a way back to a full bill of health in the longer term.
For many businesses, it’ll be a long road, but if you’ve got the confidence to keep going and keep in mind that this will pass, the temporary rules will give you one less thing to worry about.
If you’ve got any questions about the bill, or you need support or need help with anything accounting related, remember that the Chandlers team is here for you.