ACCA on what the Corporate Insolvency and Governance Bill means for businesses.

What is the purpose?

The UK government recognises that businesses are going through an unprecedented time and it is trying to provide some additional benefits to businesses and directors to help them through it.

Is it all because of Covid-19?

No.  There are new company rescue provisions that stem initially from a European Directive (Restructuring and Second Chance Directive) that came into force in 2019.  Consultation on these changes happened in 2018.  However, any new opportunities to save companies in this difficult time are welcome.

What do they mean for my business?

If you believe your business is insolvent but can be rescued, you can take advantage of a moratorium that means you have a payment holiday from most of your business’s historic debts while the rescue or restructuring happens. There are exceptions, such as staff costs which must be met. Legal action against your company cannot be continued without court approval.

How do I trade?

Your suppliers, unless they show cause, must continue to supply your business. Your business must be able to meet any debts incurred during the moratorium period. Your suppliers would not be bound by this provision for a short time during the period of the Covid-19 crisis, however, if they are a ‘small’ entity.

What is a ‘small entity’

Simply put, an entity is small if two of three of the following are true:

  1. Turnover not more than £10.2m
  2. Balance sheet ‘total’ not more than £5.1m
  3. Number of employees is not more than 50.

 Are there any historic debts that can be paid?

Yes, if the monitor consents, or the court so rules or the law suggests you should. There are exemptions on payment holidays to parties where the amount is less than £5,000 or, if greater, 1% of all debts and liabilities at the start of the moratorium.

How do I apply for a moratorium?

The moratorium is a court process and requires a monitor who will be an officer of the court and an insolvency practitioner. There will need to be an application to court. Whether there needs to be a hearing will depend on the circumstances at the time of the application and there are also some temporary rules changes to make it a little easier during the ‘relevant period’ which is currently defined as up to one month after the coming into force.

Can a monitor refuse to act?

Yes, and there may be lots of reasons. You might expect a company that applies for a moratorium to be able to afford to pay current creditors as and when they fall due and have excellent and timely management information to give the monitor some comfort that it is an appropriate mechanism.

What is the advantage of a moratorium?

When businesses are in distress, often the most critical factor is time.  A moratorium would provide that time.

I supply a business that is in a moratorium. What if it fails?

The cost of your supply after the moratorium date would be paid in priority to pre-moratorium debts in any process that happens following a moratorium, subject to pre-existing mortgages/fixed charges.

If I continue to trade in this difficult time, can I be found guilty of wrongful trading?

If a director knew or ought to have known the company was insolvent and continues to trade, a director can be personally liable for the further debts incurred. The government is suspending this provision from 1 March 2020 until one month after the introduction of the legislation (probably some time in June 2020 it will go before parliament). That does not mean that directors do not need to focus on creditors in times of financial hardship.

Can a company issue a winding up petition against my business or can I issue a winding up petition against another company?

When this legislation comes into force, there will be a temporary restriction on the issue of winding up petitions or statutory demands where the inability to pay is the result of Covid-19.

I have to hold an AGM but social distancing means that may not be possible. What do I do?

The legislation allows companies to hold general meetings by any other means even if company protocol does not allow.

I cannot file my accounts on time due to Covid-19. Will I be fined?

There is a temporary extension on time limits for filing so this is unlikely.

Article from ACCA In Practice