Credit Management July and August 2020

INSOLVENCY
PRIME STAKE
Insolvency Practitioners will be prime movers in
achieving the aims of the new Insolvency Bill.
AUTHOR – Michelle Thorp
Michelle Thorp
Acontinuous list of household
names are facing difficult
choices in the context of
economic damage that the
World forecasts could last for a
decade. The challenges will not
end when businesses reopen, confronting the
question of doing this amid what is likely to be
decreased consumer confidence and footfall,
as well as reconfigurations to safely meet social
distancing guidelines.
Adding to the list of state support measures,
the government’s Corporate Insolvency and
Governance Bill is expected to be ratified in early
July, with the government citing that ‘it is vital
that urgent action is taken to help struggling
businesses to continue to trade during the
current crisis and to boost the economy once we
emerge from it.’
So what are its features and how do those
features work in practice?
The Bill contains eight key measures. Firstly,
a moratorium will be introduced. As you may
know, a moratorium prevents legal action being
taken against companies without court approval.
This will afford companies some breathing space
to pursue a rescue plan. This measure creates the
role of Monitor, which will have to be fulfilled by
an IP. The Monitor must supervise the company’s
affairs to evaluate if the company can be rescued
as a going concern (meaning it remains viable or
can be returned to viability).
UNIQUE TESTS
There will be two types of moratorium. The first
is specifically in relation to COVID-19, with its
own unique test, and adds ‘or would do so if it
were not for any worsening of the financial
position of the company for reasons relating
to coronavirus’ to the end of the proposed
Monitor’s statement that it is likely that a
moratorium for the company would result in
the rescue of the company as a going concern.
The period for the availability of this variation
was to end on 30 June 2020, but the period will
probably be extended. The second moratorium
is a standard moratorium and will be available
for the longer term.
The company in a moratorium has to pay its
ongoing costs, so continuing to supply it may be
less of a risk for creditors. We have noted that IPs
being able to confidently make the pre-requisite
statement that a rescue as a going concern is
likely, will require some pre-appointment work,
which may make the procedure less attractive to
enter. Restrictions on termination clauses will
be brought in to prevent suppliers from stopping
(or threatening to stop supplying) businesses
in an insolvency or restructuring procedure.
The courts can agree to relieve suppliers of this
obligation if continuing to supply will harm their
business.
‘Small’ company suppliers are temporarily
exempt from the termination clause restrictions
in the COVID-19 response situation. Where the
supplier is not in its first financial year at the
relevant time, the supplier is considered to be
a ‘small’ entity if at least two of the following
conditions are met in relation to its most recent
financial year:
• its turnover was not more than £10.2m;
• its balance sheet total was not more than £5.1m;
• its employees were not more than 50.
As 90 percent of UK businesses meet the third
criterion, fewer companies may be affected by
this exemption than it may first appear.
A new restructuring plan will be available
to viable businesses in difficulty with debt. It
will be sanctioned by the courts, which will
consider whether the plan is fair, equitable and
in the interests of creditors. The plan is voted on
by creditors, but the court can impose it. It is
understood that safeguards will be put in place
for creditors who were not in favour of the plan.
Adding to these measures, wrongful trading
legislation will be suspended, temporarily
stopping the threat of directors’ personal liability
arising from continued trading in insolvency;
statutory demands and winding up petitions
will be voided so that companies can come to
pragmatic and fair agreements with creditors;
and there are changes to rules around AGMs and
filing, for more flexibility.
Just over half of the powers in the Bill are
‘Henry VIII’ powers, meaning that they can be
amended or repealed by the government making
new regulations without the need for additional
legislation.
Clearly the Bill will introduce changes for
creditors in terms of how they work with
businesses and IPs – in addition to potentially
supporting creditors themselves as businesses,
and indeed IPs and others. It is important that
all affected by the Bill are aware of its underlying
objective to support business, with IPs being a
prime mover in achieving that aim.
We continue to consider the Bill and will
monitor it in practice, offering input to help
ensure the measures serve all stakeholders in
insolvency processes correctly.
Michelle Thorp is CEO, Insolvency Practitioners
Association.
Advancing the credit profession / www.cicm.com / July & August 2020 / PAGE 11