26th May 2020


Back in April as CV-19 began to impact everything, the government announced  planned changes to the Insolvency Act, designed to help the economy  to recover, give companies the best chance of survival and protect jobs.  The Corporate Insolvency and Governance Bill is now out and is expected to progress through Parliament shortly.  The Bill is 233 pages long and not a recommended read, however the key proposed changes are set out below;

  1. A New Moratorium for companies impacted by CV-19.

Companies impacted by CV-19 can apply to court for an initial protection period of 20 business days during which no action can be taken by creditors against it as it prepares a survival plan.  The immediate potential flaw is that the company must appoint a monitor, who must be a Licensed Insolvency Practitioner, and must make a statement that in their view “it is likely that a moratorium for the company would result in the rescue of the “company” as a going concern”.  The emphasis on “company” is ours, in that the company must survive and not just the business.  The monitor is therefore saying that in his opinion, from his presumed limited involvement in the business, that all creditors will be  paid in full or that the company will likely be able to agree a Company Voluntary Arrangement (“CVA”) with its creditors.  There already exists a pre CVA moratorium process which is rarely ever used, as the Nominee must effectively certify that the company has sufficient funds to trade up to a CVA being approved.
The board are under many restrictions as to what it can do in the moratorium period and the monitor must continue to monitor the company’s affairs to ensure that the board are complying with the conditions and that his statement remains unchanged.
It is our view that this is a virtually impossible role unless the company has substantial funds to enable the monitor to properly fulfil his duties. Unsurprisingly there are provisions for creditors to challenge the monitors fees should the rescue plan fail. Our conclusion is that this is unlikely to be utilised very often in respect of most SME’s. The reality is that  engagement with key creditors during this period is likely to be the more practical solution.

  1. Continued Supply

Trading terms and condition clauses which allow suppliers from stopping or threatening  to stop supply to companies under the above moratorium or in an insolvency procedure will be no longer be effective.  Suppliers cannot demand overdue debt but can insist upon payment up front.  Small companies (turnover less than £10.2m, balance sheet less than £5m, and employees less than 50 (2 of the 3)) are temporarily exempt.
Whilst this may be helpful, in most cases as Administrators we rarely have issues obtaining supply.

  1. Suspension of Wrongful Trading

In an effort to prevent concerned directors from taking premature insolvency proceedings the legislation concerning wrongful trading is to be suspended from 1 March 2020, to 30 June 2020 or one month after the legislation comes into effect.  In determining whether a director is guilty of wrongful trading, the contribution (if any) to a company’s assets that is proper for a person to make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors, during the above period.  The current legislation basically says that a director should  cease to trade when a reasonable person should have known, or concluded that liquidation was inevitable.  There is so much uncertainty at present, both positive (government assistance) and negative (the length of CV-19 disruption), that proving wrongful trading would be a high bar anyway. Whilst the suspension of wrongful trading will be welcomed by directors, it remains to be seen whether this will be to the detriment of individual suppliers.  Directors should however be aware that it will be reinstated in July 2020 and currently all other checks and balances remain in place.

  1. Statutory Demands and Winding up Petitions

The relevant period is again 1 March-30 June 2020 and creditors may not present a winding up petition unless the creditor can demonstrate that CV-19 has not had a detrimental effect on the debtor company. Statutory Demands issued against debtor companies in the same relevant period will be void.

We believe that this is a sensible measure as it will allow distressed companies to assess government assistance measures available, which it may be precluded from doing with an outstanding winding up petition.  In addition the creditor company should not become worse off by these measures.
General Comment

The unprecedented CV-19 pandemic has necessitated unprecedented government support, and now legislative measures to slow down and hold back creditors enforcement rights. Whilst we are sceptical as regards the new moratorium and forced supply measures, the temporary suspensions  of wrongful trading and winding up action will be welcomed by under pressure directors. Other than several high profile retail insolvencies, it is apparent that the government initiatives are working in the short term. Whether however the measures will be effective in the medium term, or will be reflected upon as merely kicking cans down the road is the £300 billion question.

If you require any further information please don’t hesitate to call one of us on the numbers below;

Paul Ellison                          07967 471211 / [email protected]
Robert Keyes                       07500 933 022 / [email protected]
Gareth Roberts                    07979 706 392 / [email protected]
David Taylor                         07855 231 103 / [email protected]