Could you benefit from the new restructuring and rescue legislation?
The focus of the Corporate Insolvency and Governance Act 2020, which came into force on 26 June, is to allow SMBs extremely valuable time to formulate a rescue plan.
Vital breathing space for SMBs - the moratorium
This act introduces a formal ‘moratorium’ - an initial period of 20 business days - during which no legal action from the majority of creditors can be taken against a company without court permission.
The changes will offer concrete opportunities for restructuring and rescue plans for small and medium-sized businesses. It gives you the breathing space to explore all rescue and restructuring options, free from creditor pressure.
This moratorium can be extended for a further 20 business days if appropriate and for up to 12 months with creditor or court consent, if the extension is made before the expiry of the moratorium.
We can optimise this period of calm
You might have options that allow your business to recover and take positive steps forward. FA Simms will listen, take time to fully understand your business and methodically work through your choice of solutions.
And we’re qualified to do so: only a licensed insolvency practitioner can supervise a company entering a moratorium.
If you believe that your or your client’s company has a viable future - but is suffering cash-flow difficulties due to the coronavirus pandemic - we can use this moratorium to protect the business from creditor action.
The moratorium is a director-led process
As an insolvency practitioner, we will be acting in the role of ‘monitor’ overseeing all the business affairs, leaving the directors in place to run the company.
As ‘monitor’ we have the option of extending the initial period by a further 20 business days if the company does not become cash flow solvent in time but we believe there is still a likelihood of a rescue.
How the moratorium works
We’re already exploring the use of this helpful tool to give businesses the opportunity to survive.
One import and export client is being put under extreme pressure to pay for fuel it took delivery of on credit some months ago. However, the cash to pay for the fuel is not available until a shipment, severely delayed due to COVID-19, arrives into the UK.
Applying for a moratorium will stop legal enforcement action being taken and buy valuable time to rescue the company.
What must still be paid?
During the moratorium the company has to continue paying certain debts. These include:
- goods and services supplied during the moratorium
- rent for the moratorium period
- debts under financial contracts, including lending contracts
- wages due under employment contract
For the moratorium to be fully effective, we’ll need to assist with negotiations to obtain the support of lenders and possibly agree a payment holiday with them. Gaining lender support is key as it will be possible for lenders who do not support the moratorium to bring it to an end.
What can - and cannot - be enforced during a moratorium?
An employment tribunal proceeding can continue during the moratorium: this does not require consent from the court to commence or continue.
But throughout the moratorium the following cannot happen:
- no legal proceeding can be started (except employment tribunal issues)
- a landlord may not exercise rights to terminate a lease
- goods under a hire purchase contract cannot be repossessed
- security cannot be enforced (except financial collateral)
Relaxation on of wrongful trading
The Corporate Insolvency and Governance Bill has also temporarily suspended ‘wrongful trading’. This has been introduced to remove the threat for company directors who continue to trade through the economic difficulties caused by the coronavirus pandemic. Liquidators and administrators will be restricted from making a claim against an insolvent company’s directors. This will be for any losses to the company or its creditors if they continue to trade when ordinarily they may be obliged to stop trading and enter a formal insolvency process. This will help to avoid the threat of personal liability for the directors.
The relaxation of the wrongful trading restrictions during the pandemic are to allow businesses to avoid the need for insolvency at a time when there is great uncertainty over their future. This is no doubt a positive move on behalf of the government and one that I am sure was not taken lightly. It will be interesting to see when this relaxation will come to an end.
The good news is that this allows businesses breathing space to review, assess and rebuild.
However, these changes are yet to be tested and where a company can be shown to be insolvent before COVID-19, it is not expected that the changes will protect company directors against wrong trading allegations before the pandemic. They will also not protect directors in the event they can be seen to have unreasonably benefited from the company – for example using government support such as a Bounce Back Loan inappropriately to pay back loans from yourself to your business or to borrow money from the company.
I have not seen much about paying dividends from a company during the relaxed wrongful trading rules. If a company is insolvent, it should not pay dividends. What I can imagine is that a company can be insolvent and not be criticised for wrongful trading but is still insolvent for the purposes of payment of a dividend.
This is another area that you must be aware of to ensure that dividends are not being paid if there is a risk that a company could be shown to be balance sheet or cash flow insolvent.
Richard Simms, managing director, F A Simms & Partners Limited