A Little more Forbearance….Protection From The Threat of Winding Up Petitions
New legislation has been passed to give companies a fighting chance of survival as businesses struggle to emerge from the lockdown restrictions. A range of measures have been introduced to allow breathing space for Companies to restructure debt and to protect against aggressive debt collection.
The Corporate Insolvency and Governance Act 2020 (“CIGA”) came into effect on 26th June 2020 and there are three main headings designed to help Companies. Some of these measures are permanent changes that have been on the planning table since 2016 and which have now been fast tracked into legislation to protect companies looking to restructure. Some are temporary measures designed to afford protection from the threat of debt enforcement whilst the effects of Covid-19 continue to be felt.
Two of the permanent changes will be most effective for larger companies and involve a moratorium period of 20 days, monitored by an insolvency practitioner, to allow the Directors to explore and put forward restructuring plans and ultimately survive. We are considering the new legislation to see if it might also be a cost effective option for smaller companies.
Changes also include anti-termination clauses in supply contracts, obliging a supplier of goods and services essential to the Company to continue that supply without insisting on payment of arrears or price hikes whilst insolvency or restructuring procedures are in place.
The third heading, however, is effective for businesses of all sizes and will be of particular interest to the SME market. New legislation will provide breathing space by reducing significantly the immediate threat of winding up proceedings.
A Temporary Stay on Winding Up Proceedings
As a further measure of forbearance the new legislation introduces restrictions on creditors presenting winding up petitions against debtor companies. The restrictions apply for the period 27th April to 30th September 2020.
This isn’t a complete ban on winding up petitions but rather seeks to protect companies in financial difficulty resulting from Covid-19. A creditor can still issue a petition if they can satisfy the Court that the financial problems of the debtor company pre-exist the impact of Covid-19.
This serves as a deterrent to creditors intending to present petitions. If the Court is not satisfied that the debtor company could not pay its debts irrespective of Covid-19, there is a risk of adverse costs and damages if the petition is dismissed.
The onus is therefore on the petitioning creditor to establish that Covod-19 has had no “financial effect” on the debtor company. Given the severity and scope the effects of Covid-19 has had on many companies, it is expected that a petitioning creditor will find it very difficult to persuade the Court the debtor company’s financial position has not worsened as a result of Covid-19.
A Breathing Space for Businesses
This new legislation will help Companies get back on their feet after the initial impact of Covid-19 and make the changes necessary to cope with the effects that will be with us for some time to come.
However, the restriction isn’t going to last forever and come October 2020, we may see a flurry of winding up petitions as the restrictions fall away.
Whilst this allows some breathing space for Companies, the next 2-3 months may not be enough time to resolve all issues. Companies that continue to suffer financial distress should seek professional advice and not wait until the end of September 2020, at which point there will be more exposure to aggressive debt collection.
The Team at Poppleton and Appleby are continuing to provide help and support to a growing number of clients throughout this crisis and we are seeing a significant increase in the number of worried business owners seeking advice on options. Please see our website for contact details if you need support in advising your own clients https://www.poppletonandappleby.co.uk/