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Given the current crisis facing the UK and the world at this time, the Government has taken steps to try to reduce the number of SME and SOHO businesses that become insolvent as a result of the COVID-19 pandemic.
The changes have recently been extended further and this guide will take a look at the key changes that have been made by the Corporate Insolvency and Governance Act 2020 (CIGA) and will give you a brief overview of those changes and the updated position.
CIGA has introduced a free-standing moratorium, or a period of formal breathing space, to enable the distressed company to devise a rescue plan. This is initially a 20-business day period, which can be extendedby a further 20 days.
An insolvency practitioner will be required to confirm that, in their opinion, the company can be rescued as going concern.
A payment holiday applies to all pre-moratorium debts effectively preventing creditors from enforcing their debts during the period of the moratorium. However, any ongoing supply provided during the period of the moratorium is not to be subject to a payment holiday and is still recoverable. Examples of these include goods and services supplied during the moratorium, rent, wages and salaries. As such, the moratorium should be a very helpful tool for SMEs whose majority of outgoings are likely to be overheads.
A new ‘restructuring plan’ was introduced by CIGA. It is modelled on schemes of arrangement, but introduces a ‘crossclass cram down mechanism’ meaning that dissenting creditors or shareholders in a class (holding less than 25% in value of claims in that class) can be forced to accept the proposal and be bound by it, even if they do not accept it.
One of the main differences between the restructuring plan and a CVA is that the company does not need to show that it is in financial difficulty at this time, just that it is likely to encounter financial difficulties. SMEs are less likely to have huge amounts of capital to support them through the pandemic and so this proactive approach will be invaluable in the continuation of the business.
CIGA inserts a section into current insolvency legislation meaning that suppliers can no longer rely on clauses in terms and conditions which allow them to stop supplying a customer if they enter some kind of insolvency.
Under the new rule, a supplier is only able to stop supplying when the insolvency practitioner or company consented to this or alternatively, if the court is satisfied that by continuing to supply, the supplier would face hardship itself.
Suspension of wrongful trading
The law in this area means that a director can be personally liable when they continue to trade a company when they know or ought to know that the company is insolvent (unable to pay its debts as they fall due) and there is no reasonable prospect of avoiding insolvency. A director can be liable for any invoices they pay during this time if they are paid in preference to other creditors.
CIGA temporarily suspended the law in this area from 01 March 2020, which has now been extended until 31 March 2021.
The suspension has been put in place in an attempt to keep businesses that may otherwise have become insolvent during COVID-19 afloat by reducing the personal liability a director would face in trying to keep their business trading.
Restrictions on winding up petitions
CIGA introduced the following restrictions in terms of winding up a company:
1. Statutory demands served on a company during the relevant period cannot be used to present a winding up
2. Winding up petitions cannot be presented during the relevant period unless you have reasonable grounds for believing that coronavirus has not had a financial impact and the debt would have arisen in any event.
3. Winding up orders granted after 27 April 2020, but prior to CIGA coming into force, are void if the court would not have made the order if applying the terms of CIGA in its consideration of the petition.
The relevant period has been extended to 31 March 2021, having commenced on 01 March 2020. This means that currently, the ability to present winding up petitions is severely limited, and even though theoretically possible, it is fraught with the potential for major dispute and increased costs of argument over the CIGA restrictions.ternatively, if the court is satisfied that by continuing to supply, the supplier would face hardship itself.
For further information or any queries relating to these updates, please contact us on 01332 226 480 or complete the form below.
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