Are you up to speed on major changes to business restructuring?
Among the many government schemes launched to help businesses during the COVID-19 pandemic, one valuable tool risks flying under the radar.
The Corporate Insolvency and Governance Act 2020 represents the biggest change to UK restructuring legislation in a generation. It gives distressed companies new ways to address their difficulties while still remaining in control and being able to continue trading.
These new measures are likely to prove vital as many UK businesses ramp up trading but continue to face uncertain demand and constrained working capital. The new Act provides such companies with vital breathing space to get back on their feet. But even if your company is trading successfully, it’s important to know the basics because it’s likely that, within your supply chain, customers base or even amongst your competitors, there will be a company deploying it soon – and this may well affect your business.
There are two new, critical areas to look at. Firstly, the Act offers struggling companies some breathing space known as a moratorium. This is an extendable 20-day period that provides a ‘payment holiday’ from most debts and buys vital time to develop a turnaround plan. Directors need to appoint a licenced insolvency practitioner to act as monitor, pay promptly for any goods and services purchased during the moratorium, and crucially they need to believe they are likely to find a path to becoming a viable business to enable them to rescue the company.
Secondly, the legislation introduces the concept of a restructuring plan which allows companies to propose and, subject to creditor and court consent, enforce balance sheet restructuring alternatives. One major attraction for companies is the potential to put forward different outcomes for different creditor groups.
So that’s the theory, but what about the practice? If we take a struggling high street retailer, the new restructuring plan could be applied in a number of ways. The first could be to amend leases and exit underperforming stores. The second could be to reduce or rescheduled unsecured debts. And thirdly, in certain circumstances, the retailer could reduce or write off their secured debt. That is something that cannot be done through a Company Voluntary Arrangement (CVA), which would have been the favoured option before the new legislation was introduced and is likely to be preferred to a pre-pack Administration.
That highlights another advantage of the restructuring plan. It enables businesses dealing with the temporary impact of COVID-19 to address their problems without entering into a formal insolvency that may be less flexible and could result in reputational damage. It also keeps directors in control throughout the process and means that their business can continue trading with suppliers and customers.
It’s important that all companies are aware of the new legislation. Even the healthiest business may have a struggling supplier looking to use the new tools to keep afloat. Or you might have a customer in difficulty who tries to exit contracts or use a moratorium to delay payments. You could even be asked to vote on their restructuring plan, in which they attempt to write off or restrict their debts to you. Finally, a healthy business may find that a competitor is using these new restructuring tools to gain an advantage.
Although the new legislation was only introduced at the end of June, we are already seeing businesses, including one major airline, put it to use – and we expect this trend to accelerate. The Corporate Insolvency and Governance Act 2020 may not have received the fanfare that accompanied other recent government initiatives, but it could yet prove one of the most effective.
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Dan Hurd – EY UK and Ireland Partner, Turnaround and Restructuring Strategy
Lucy Winterborne – EY UK and Ireland Associate Partner, Turnaround and Restructuring Strategy