The Corporate Insolvency and Governance Act (CIGA) 2020 was introduced as a response to the Covid-19 pandemic and is designed to increase the chances of company survival.
How does the Act protect companies?
The Act has put into place the following temporary measures (specific to Covid only):-
- Preventing creditors to force companies into liquidation via a Court order (Winding up Order/Petition)
- Suspending wrongful trading laws. This means companies can carry on trading even if they know they are in serious financial trouble and risk Liquidation. Previously this was forbidden under the Insolvency Act 1986
The following permanent measures are in place (to be permanently embedded into law even after Covid):
- Allowing companies to apply for a moratorium. This will protect the business from legal action from creditors and buys them time to think about how they can restructure and rescue themselves
- Suspension of termination clauses in supplier contracts
- Allows companies to put in a place a restructuring plan
We have previously written about suspension of termination clauses and the restructuring plan. This blog in our series will focus on the moratorium.
What is a moratorium?
A company in severe financial difficulty can apply for a moratorium at the Court. The moratorium will protect a company from Creditor legal action for 20 days. This gives the company some breathing room to think about their options without having to worry about receiving Court orders via their Creditors. To successfully be granted a moratorium, your financial situation should be severe and genuine.
Moratoriums are an excellent provision in the CIGA 2020 framework because:
- You don’t need permission from your Creditors, you can apply for one without them knowing/or notifying them
- It gives you legal breathing space for 20 days, which can be extended by another 20 days to a total of 40 days. Anything beyond 40 days would require permission from Creditors
- You don’t have to pay anything to apply for one
Any type of business, except financial institutions can apply for one. There are no other conditions and restrictions for businesses.
How do I know if a moratorium is right for my business?
As a Business Owner or Company Director, you should seek advice before considering whether this option is viable for your business. Any advice will cover a detailed look at your business and its finances and assess whether a moratorium is in the best interest of the business.
A moratorium is ideal in those circumstances where there is a way to save the business in the 20-40 day vacuum provided by the moratorium.
During the moratorium period, your Company affairs are managed by the Insolvency Practitioner (IP) who, once the moratorium application is successful, will discuss your options and do what is needed to help keep the business afloat, including all communication with Creditors.
Next steps
Many businesses’ daily operation and cash flow is likely to be affected with the UK just coming out of a lockdown and with various parts of the country immediately entering tier 3, which is the highest Covid alert level.
Now is the best time for your Company to assess its options for sustainability for the remainder of 2020 and into 2021. If you want to find out more about how the CIGA 2020 Law can help your business or moratoriums in particular, please call me on 0330 236 9930, 0330 236 9938 or 07961 116321. The first conversation is free of charge and all conversations are in strict confidence. You can also email me on vee@navigatebr.com
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