Insolvency lifeline for businesses

With the pandemic showing no signs of distancing itself (socially or otherwise) from our lives, the government has armed the business rescue profession with options to help companies keep their heads above water, until the arrival of calmer conditions on other side of this historical and unprecedented period. The Corporate Insolvency and Governance Act came into force in June, with a packed 240 pages of updates, new instruments and tweaks - both temporary and permanent.

The measures are aimed at helping companies that were previously prosperous and are suffering due to the pandemic. It is widely referred to, justifiably, as the most significant change to corporate insolvency law in 20 years. Included in the huge document are some helpful temporary changes, such as allowing company accounts to be fi led late – with the extension available for accounts fi ling between 27 June 2020 – 5 April 2021 (inclusive). It also allows annual general meetings to take place virtually - including voting - and in some instances pushed back.

However, the biggest change is the introduction of a ‘moratorium’. It essentially provides directors with 20 business days to formulate a rescue plan with no fear of legal petitions, such as winding up orders, and to remain at the helm. However, a monitor such as an insolvency practitioner (IP) must be appointed to oversee the 20-day period to ensure a plan is being created. The IP can extend this period another 20 days and, if necessary with creditor backing, up to a year. Equally as important, it ensures suppliers continue as usual without interruption or increasing their rates, which are issues that can happen during other types of insolvency processes.

“This act is fostering a constructive and imaginative environment in which everyone is trying to fi nd solutions,” says Colin Haig, newly-appointed president of insolvency trade body R3. “This will be a useful tool to help companies, especially SMEs.”

The moratorium encompasses elements of a Company Voluntary Arrangement (CVA), popular among retailers; Schemes of Arrangement, popular with insurers and complex large companies; Chapter 11, the North American restructuring tool; and the Canadian Company Creditors Arrangement Act (CCAA). Frances Coulson, managing partner and head of litigation and solvency at law firm Moon Beever says companies shouldn’t think of this as a form of insolvency, but more as a “form of government help such as the furlough scheme, to help rescue business during this time of uncertainty”.

The second headline-grabbing implementation is the Restructuring Plan, which is similar to a CVA in that it allows struggling companies or their creditors to propose a new debt restructuring plan. However, where it differs is the introduction of what is dubbed the ‘cross-class cram down’, which means a judge can bind creditors to the plan if the judge believes it is fair, equitable and satisfies those creditors who would be no worse off if in an alternative insolvency structure. But, if the majority of creditors are unhappy and vote against it, a judge is unlikely to enforce. 

“An alternative could be liquidation and if you don’t get a plan approved it is most likely liquidation will be the alternative,” explains Ed Macnamara, refinancing, restructuring and insolvency partner at PwC.

The two newly-introduced restructuring vehicles are designed to compliment each other, with the moratorium working in the short-term with a possible exit via the restructuring plan, Macnamara explains.

However, these measures are not here to help companies that were going insolvent anyway. “It is a way of giving directors time and options to weather the storm and is not meant to stave off insolvency if insolvency was inevitable pre-crisis,” says Macnamara.

The new measures are designed to ease burdens on small businesses in particular, and as always the profession stresses the importance of seeking advice early. “The better the advice and the quicker you get it, the better the outcome and the more options you’ll have available to you,” says R3’s Haig.

Rachael Singh is a freelance journalist