An official review of permanent measures that were introduced during the pandemic to protect businesses that might be at risk of insolvency, has been completed. The good news for ailing businesses is that the measures are here to stay – but how useful will they be and what do credit managers need to know?
The Corporate Insolvency and Governance Act 2020 – Final Evaluation Report was published by the Insolvency Service on 19 December 2022, based on independent research carried out by the University of Wolverhampton. The report includes an assessment of three permanent measures, which, when they took effect on 26 June 2020, represented the most significant changes in insolvency law since 2003.
With many businesses facing challenging headwinds, credit managers need to be alert to the new measures and how they may be impacted.
How useful have the measures proved in practice?
Restructuring Plans (Part 26A of the Companies Act 2006)
A restructuring plan proposal is put to the creditors when the court orders the convening of meetings of different classes of the company’s creditors. 75 percent of creditors in each class need to agree to the plan, however the court may nevertheless sanction or approve the restructuring plan if one of the creditor classes rejects the proposals, provided that those creditors will be no worse off in the event of the relevant alternative, usually a liquidation.
It was originally thought that uptake of restructuring plans would be low as they could be costly and slow to implement, primarily due to the need for court involvement. However, they have proved more popular than expected (12 have been approved to 31 December 2022), and this is evidenced by the fact that they have also been used by the SME market.
Overall, restructuring plans give businesses that are struggling a chance to remain viable, alongside the more typical – administration, Company Voluntary Arrangement or Scheme of Arrangement.
If a business finds itself as a creditor in a restructuring plan, it is important to review the proposal and assimilate what the outcome will be for them early, to vote and have their say.
The measure known as ‘standalone moratorium’ is designed to protect businesses on a short-term basis, initially 20 days, from any legal action by creditors. The measure is helpful in that it gives the business and its directors breathing space to consider their options. While the moratorium shouldn’t delay a decision to enter into an insolvency process where it is clear that creditors’ interests can’t be met, it could be useful if the business is expecting the completion of a major contract, for example.
There have been 40 company moratoriums obtained to 31 December 2022, meaning that they are seen as a useful tool and we may see more of them.
For credit managers, it is important to be aware that if a moratorium is in place, not to start any legal action, but to be mindful that if supply is continued, a ‘super priority creditor’ status will apply.
Restrictions on contractual termination
The restrictions are designed to prevent suppliers from stopping or threatening to stop providing goods or services to the business after it has entered an insolvency process. Before the pandemic, such clauses were used by insolvency practitioners to stop providers terminating contracts relating to certain supplies that were deemed necessary for the ailing business. This has now been extended to other services, however for smaller suppliers, there is the protection of the ‘hardship provision’, which means they can still issue a demand for monies owed.
It is too early to say how useful this change has been as the insolvency numbers have been low, but credit managers should tread carefully if continued supply has been requested in an insolvency. However, it can be made a condition of the continued supply that the insolvency practitioner personally guarantees the payment of any charges in respect of it.
For more information about how these permanent measures could affect your business, please contact the Business Recovery Team at Menzies or contact us below: