CIGA 2020: will the new insolvency law help businesses stay afloat?

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) sped through drafting and parliament in a matter of weeks, despite the fact that some aspects of it had been in consultation since 2012. This urgency reflects the Government’s belief that companies will need breathing space, and an alternative to formal insolvency, to trade through the current economic crisis caused by coronavirus.

That seems a fair assumption, since the UK economy contracted by 20.4 per cent in April alone  – the largest monthly fall on record. So CIGA 2020 could be crucial to economic recovery, especially as the full economic impact of the pandemic will only become clear in Q2.

How much help will the economy need to recover after coronavirus?

While a post-lockdown trip to the shop involves a queue to get in and a queue to pay and leave, economic recovery is likely to be as sluggish as a shopper’s progress through said shop. The famous British weather may also have more of an impact on shopping habits than usual, with biting wind and rain not usually conducive to healthy spending. Indoor shopping centres aren’t safe either, as the recent collapse into administration of INTU shows.

Meanwhile, the banks have approved over 52,000 Coronavirus Business Interruption Loans totalling £11bn. In addition, nearly one million Business Bounce Back Loans totalling a whopping £29bn have been approved, of which it’s estimated that around 40 per cent may not be repaid. So it’s clear that help is needed but also – and here’s the positive – that company directors are determined to weather the economic storm if they can.

Will CIGA 2020 actually work?

Only time will tell whether the legislation will help to shore up the economy and enable business hit by the pandemic to trade their way out of financial difficulties. That’s certainly the aim of CIGA 2020, which includes a raft of measures to protect companies from their debt and facilitate trading during the current economic environment.

These measures include:

  • a new moratorium to give companies breathing space from creditor pressure;
  • a corporate restructuring plan to enable a company to eliminate, reduce, prevent or mitigate the effect of financial difficulties that could affect its ability to carry on business as a going concern;
  • an extension of protection of supplies legislation, previously limited to ‘essential’ suppliers, designed to prevent ransom payments or punitive credit terms which would impact a company’s ability to trade;
  • breathing space for directors, with a blanket requirement on courts to assume directors are not responsible for any worsening of the financial position of the company or its creditors during the relevant period; and
  • no winding up petition can be presented on the basis of a statutory demand, unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect. 

Any legislation drafted this quickly will contain grey areas that need more clarity, especially if it introduces the biggest changes to insolvency law since the Enterprise Act 2002.

The main risk with CIGA 2020 seems to be that, as it’s aimed at SMEs, the cost and risk burden of the moratorium will mean it becomes little-used – as well as the preserve of only the most efficiently run SMEs and larger eligible entities. This could cause it to end up in the long grass with the ‘Schedule A1 CVA Moratorium’, which the CIGA 2020 repealed (due to lack of use).

What’s more, it seems that only ‘contractual’ suppliers fall into the new protection of supplies legislation, which may have little impact on securing those vital ‘on account’ trade supplies. And only time will tell if the temporary changes to the wrongful trading legislation will be open to abuse and undermine corporate accountability and governance.

We can help

Directors will be challenged and restructuring professionals will be needed to ensure they understand the full raft of options available and comply with their new obligations, particularly on the moratorium and corporate restructuring plans.

These two measures are designed to encourage early director engagement and avoid formal insolvency, and they will work best when directors engage early with restructuring professionals.

Contact Lindsey Cooper to find out how we can support your business. 

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