Guest article: Insolvency Practitioners – how to prepare for 2021

Our thanks to Hudson Weir for this contribution to Insolvency Practitioner. Please note that this article does not necessarily represent the views of the IPA.

The economy has been affected severely this year in an unparalleled way, due to Covid-19.

As such, it is more important than ever before that financial advisors play an important role in supporting people and organisations encountering unemployment or financial difficulties due to their employer becoming insolvent.

Despite the lockdown period, financial advisors must continue assisting individuals and businesses, offering debt relief for people in financial distress; providing redundancy payments to anyone who has lost their job; and liquidating businesses where there is no possibility of salvage. All services are delivered, continuously, via technology to support these clients. 

It is paramount that financial advisors deliver economic confidence to those experiencing financial difficulties, confronting financial offences in this field and capitalising on returns to creditors.

Creditors must follow the Corporate Insolvency and Governance Act 2020, which implements new policies as a result of COVID-19. The act offers new rescue opportunities to aid in the recovery and survival of businesses.

Insolvency practitioners (IPs) can deliver economic confidence through:

  • Addressing financial misconduct;
  • Supporting individuals and companies experiencing financial difficulties; and
  • Boosting returns to creditors.

This revised legislation presents the most important change to the corporate insolvency infrastructure for many years.

Thanks to the Government’s across-the-board response, IPs can support companies and people affected by the impact of the virus, and it has limited the number of insolvencies since March 2020.

Government Help is Available

If an individual or business is struggling financially during this time, an IP must ensure their client takes advantage of all the government support schemes available to them, including the Bounce Back Loan Scheme, which provides businesses with the financial boost it needs, and the Coronavirus Job Retention Scheme (CJRS) , which can facilitate employers in paying their workers.

Also available are a variety of tax deferral and grant schemes to provide the financial breathing space businesses and people need during Covid-19.

The Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act (CIGA) was enforced on 26th June 2020, which implemented significant modifications to the UK’s insolvency and company laws to offer short-term help to businesses and their directors throughout the pandemic.

Moreover, there have been permanent changes that will strengthen the UK’s restructuring tool kit considerably.

Aside from the above, the CIGA executes actions covered in the UK Government’s discussion on Insolvency and Corporate Governance which ended in August 2018.

Essentially, the CIGA implements particular temporary and permanent adjustments to the legislation in the UK, as per below:

Temporary Changes

  • Short-term alterations concerning how and when creditors can grant legal demands and winding-up appeals.
  • Giving shareholders more time when it comes to hosting consultations and more flexibility to make specific filings at Companies House.
  • Suspending wrongful trading regulations, lessening the danger of directors being solely accountable for continuing to operate throughout the period 1st March 2020 until 30th September 2020.

Furthermore, on the 25th November, the Government announced an intention to reinstate this suspension, effective in England, Wales and Scotland from 26th November (and 14th December in Northern Ireland) until 30th April 2021.

According to the CIGA, the court must presume the director has no responsibility for any deterioration of the financial position of the business or its creditors during Covid-19. Thus, this decreases – rather than removes – the danger of personal accountability for directors concerning measures carried out during the pandemic, giving directors further reassurance to continue operating.

Permanent Changes

  • Ipso facto is prohibited, as this licenses traders of services and goods from ending or changing stock to an organisation owing to the onset of liquidation and restructuring processes. This stops suppliers having the opportunity to put a struggling business at risk by:
    • Eliminating the need for cash upfront
    • Ensuring that the supplier’s outstanding fees are paid as a condition to continued supply as soon as the business becomes involved in an insolvency process, which may be damaging for the rescue of that business.
  • A new ‘moratorium’ process for businesses experiencing financial distress. This latest permanent change under the CIGA can be accessed by all businesses, excluding banks, insurance organisations and several other financial establishments, as well as businesses that were formerly subject to a moratorium or a number of official insolvency processes in the last 12 months. Overseas businesses are also entitled, so long as they can prove they have an adequate relationship with the UK.
  • An original restructuring process (Restructuring Plan), that mimics the UK scheme of arrangement procedure (UK Scheme) – however, this scheme is able to ‘cram-down’ complete dissenting classes of shareholders and/or creditors.

With pre-Covid-19 normalcy unlikely to resume, IPs are going to have to prepare companies for an incredibly different future.