Is this the lifeline businesses need or the beginning of accepting corporate failure?

On June 25th 2020, something called the Corporate Insolvency and Governance Bill received royal assent and became an Act of Parliament. The new Act gives more protection to directors of companies that are trading as insolvent.

Since the new piece of legislation was passed, some have argued that it will encourage corporate failure and, in turn, let leaders off the hook, but others have argued that it’s a sensible measure to take, considering how tumultuous and fragile the UK economy is.

To find out more about the detail, Business Leader spoke to Mark Phillips QC. He is a Barrister at South Square.

He comments: “CIGA 20 is the most significant piece of restructuring legislation since the Insolvency Act 1986. It is hugely significant in that it gives companies the tools necessary to rescue businesses, restructure debt and save livelihoods.

“There is now huge flexibility in the approaches now available to restructuring professionals. The COVID-19 crisis has resulted in thousands of companies accumulating fixed debt during the lockdown period that now has to be dealt with. This is not a case where businesses have built up debt by choice or recklessly.

“Business now need to assess that debt, look at its available funds, look at other sources of funds, including affordable bank debt, and offer its creditors a workable percentage that will enable it to put the COVID lockdown behind it and look to its future trading. Almost no business will be able to absorb 15 weeks of fixed costs, so everyone needs to accept that they will only recover a percentage of what fell due to them during that period. If creditors are not prepared to accept a percentage, then companies have options through CVA’s, schemes or the new arrangement and reconstruction provisions.”

Mark continues: “For the first time in UK law, the new arrangement and reconstruction provisions include cross class crackdown provisions. If one class approves the arrangement by a majority of 75%, dissenting classes can be bound by the arrangement provided that what they get under the arrangement is at least as good as ’the relevant alternative’, which is what would happen if the arrangement wasn’t passed. Holdout debt should become a problem of the past.

“There are several key dates looming; First, at the end of September, the moratorium on enforcement of debts by winding up petition will end, as will the moratorium on landlords enforcing against tenants; in January, the deferred July tax bills become payable, and from the Spring, the CBIL’s loans will either need to be repaid or refinanced. Companies that need protection have two very constructive options: first, a light touch administration which leaves the directors managing the business but the administrator managing the restructuring, and secondly, the new moratorium procedure which leaves the directors in control subject to the supervision of the monitor. The days when the directors simply handed over the business to an insolvency practitioner are over.”

In regard to the bill, there have been some that have said it has been rushed through parliament.

Mark disagrees: “CIGA 20 was not ‘rushed through parliament’. The amendments to our insolvency regime were the subject matter of extensive consultation and a Green Paper. Additional temporary provisions were added to the bill and its progress was accelerated, but it was not rushed. Several people, including me, helped HMG to move it along.

“The idea that it encourages corporate failure or allows failing leaders to get off the hook is nonsense. First, it encourages corporate rescue and reconstruction. Second, directors of companies that have incurred debt during lockdown have, to use Boris Johnson’s words ‘done nothing wrong’. No one could have predicted or planned for this pandemic, and no company budgets on the basis that its fixed costs will continue and that it will receive little or no income.

“Third, the wrongful trading provisions that have been suspended wouldn’t have applied anyway. The Insolvency Act 1986 (section 214) requires the people to take the steps that a director with the required skill set ought to have taken to minimise the loss to creditors. Over the COVID lockdown period, there was hardly anything directors could do.”

So how has the new Bill been received by industry leaders?

Jonathan Geldart, Director General of the Institute of Directors (IoD) comments: “Directors have significant legal obligations, and this Bill provides some reassurance that those who act responsibly won’t be caught out by the insolvency system. It’s crucial that directors are able to sustain their organisations and the people who rely on them during these difficult times.”

FSB National Chair Mike Cherry echoed this sentiment, saying that it would mean that many businesses survive: “The incoming Corporate Insolvency and Governance Bill will be an important step to helping many small firms during this crisis. The measures will immediately go some way to mitigate some of the problems small businesses are facing, such as the relaxation of wrongful trading rules which will allow directors of struggling companies to continue trading without fear of legal repercussions. The company moratorium, filing extensions and voiding of statutory demands are particularly important for smaller businesses, it is important that these provisions continue for as long as is necessary.”

Sam Talby, who is Partner at PCR LLP, argues though that there could be some negative consequences to the bill.

He comments: “I believe that if we are not careful, the legislation will create a ‘Non-Payment Culture’. For example, where a company has entered an insolvency or restructuring procedure, or obtains a moratorium, the company’s suppliers will not be able to rely on terms and conditions to stop supplying or vary contract terms with the company.

“The New Insolvency regime creates a Moratorium with the aim of giving a breathing space to seek a rescue plan. The initial moratorium lasts for an initial 20 days and can be extended to 40 days via Court Application or Creditor Agreement and up to a further year.

“During moratorium, no legal action can be brought against the company without leave of the court. It is the creditors who will have to bear the loss whilst still supplying the company. It is also worth noting that this moratorium can be increased to a year with consent of the creditors.

“In addition to this, outstanding amounts due for past supplies are not required to be paid for whilst the company arranges its rescue plan. This is only varied if having to make a supply would cause hardship to their business. This means there is no active control of the company seeking the rescue, other than it being monitored by an insolvency practitioner.

“Whilst the change is an attempt to benefit genuine attempts at restructuring, it will inevitably lead to abuses by the unscrupulous with the supply chain likely to suffer.”