The UK Corporate Insolvency and Governance Act 2020 is one of the most significant pieces of legislation affecting corporate insolvency in the UK. Designed to provide businesses with greater flexibility and support during financial distress, this Act introduces several important reforms aimed at both helping struggling companies and making sure creditors receive fair treatment. In this blog, we’ll explore the key provisions of the Insolvency and Governance Act 2020, its impact on businesses and how it can influence the course of insolvency proceedings.

Overview of the Insolvency and Governance Act 2020

The Insolvency and Governance Act 2020 was introduced against the backdrop of the COVID-19 pandemic, which had a huge impact on businesses across various sectors, causing unprecedented financial strain. Recognising the urgent need for enhanced support mechanisms, the UK government passed this legislation to address the multifaceted challenges faced by companies struggling with severe financial difficulties, aiming to provide a lifeline and support recovery during these trying times.

Key provisions of the act

The Insolvency and Governance Act 2020 introduces several key mechanisms to support businesses in financial difficulty. These include:

  • Corporate restructuring plan

One of the main features of the Insolvency and Governance Act 2020 is the introduction of the Corporate Restructuring Plan. This mechanism offers companies in financial distress a formal procedure to reach an agreement with creditors. Unlike previous schemes, this plan allows for compromises that can bind creditors who didn’t vote in favour, provided a certain threshold of creditor support is achieved.

  • Moratorium on insolvency proceedings

The Act also introduced a new moratorium process, providing companies with temporary breathing space to explore restructuring options without the immediate threat of legal action from creditors. This moratorium lasts for 20 business days but can be extended if needed. During this period, companies are shielded from most forms of creditor enforcement, giving them time to formulate a viable recovery plan.

  • Restrictions on termination clauses

Another key reform is the restriction on enforcing certain contractual termination clauses. If a company is subject to a moratorium or restructuring plan, suppliers can’t terminate contracts solely because of the company’s insolvency or failure to pay. This provision aims to make sure that businesses in distress can continue to operate and maintain essential supplies and services.

  • Temporary changes to the insolvency regime

To address the immediate economic impact of the pandemic, the Insolvency and Governance Act 2020 also introduced temporary changes to insolvency procedures. These include temporary restrictions on winding up petitions and adjustments to wrongful trading provisions. These measures were designed to provide additional relief to businesses facing unprecedented challenges.

Impact on businesses

To fully appreciate the benefits of the Insolvency and Governance Act 2020, it’s important to consider the specific advantages it provides through its key provisions:

  • Enhanced flexibility for restructuring

The Insolvency and Governance Act 2020 offers businesses a more flexible approach to restructuring than previous frameworks, enhancing their ability to deal with financial distress. The Corporate Restructuring Plan facilitates more comprehensive and delicate negotiations with creditors, accommodating various stakeholder interests. This structured route not only helps in achieving a successful turnaround but also enables companies to tailor solutions that address their specific challenges, thereby improving their chances of a sustainable recovery.

  • Protection for Key Suppliers

The restriction on ending contracts is particularly beneficial for businesses that rely heavily on critical suppliers and service providers. By preventing suppliers from terminating contracts solely due to the company’s insolvency, this provision allows businesses to continue their operations without disruption. This protection is important for maintaining operational continuity, which is essential for both short-term survival and long-term success, as it allows businesses to focus on recovery without losing key resources and services.

  • Improved support during financial distress

The moratorium process provides a valuable opportunity for companies to stabilise their operations and explore various restructuring options, without the immediate pressure of creditor action. This temporary relief period allows companies to assess their financial situation, develop a robust recovery plan and negotiate with stakeholders without fearing imminent legal consequences. Such support can significantly improve a company’s ability to recover, boost its financial health and ultimately emerge from insolvency with a stronger foundation for future growth.

Navigating the Insolvency and Governance Act 2020

To effectively handle the challenges posed by the Insolvency and Governance Act 2020, businesses should focus on the following areas:

  • Seeking professional advice

Dealing with the Insolvency and Governance Act 2020 can be challenging due to its intricate provisions and potential legal ramifications. Businesses facing financial difficulties should seek expert advice from insolvency practitioners and legal advisors to fully understand their options and make sure they comply with the new legal framework. These professionals can provide invaluable guidance and tailored support throughout the process, helping to manage potential pitfalls and implement effective strategies for recovery.

  • Evaluating restructuring options

When considering restructuring under the Corporate Restructuring Plan, it’s essential to evaluate all available options and thoroughly assess their implications for the company’s future stability and growth. Engaging with stakeholders early in the process, and effectively communicating the proposed plan, can help gather the necessary support and facilitate a successful restructuring. This proactive approach makes sure that all potential scenarios are explored and that the plan aligns with the company’s long-term objectives.

  • Understanding contractual obligations

For businesses in financial distress, understanding the implications of restrictions on termination clauses is important for maintaining operational stability. It’s advisable to review existing contracts carefully and get advice from professionals on how these provisions might impact the company’s operations, financial obligations and relationships with suppliers. A full review of these factors will help in reducing risks and making sure that essential contracts remain enforceable, supporting the company’s recovery and continuity.

Embracing the Insolvency and Governance Act 2020 for effective recovery

The UK Corporate Insolvency and Governance Act 2020 represents a big move forward in managing corporate financial distress. By introducing new mechanisms for restructuring, providing temporary relief measures and protecting key contractual relationships, the Act offers valuable support to businesses facing insolvency.

Adhering to the provisions of the Insolvency and Governance Act 2020 requires careful consideration and professional help. Businesses experiencing financial difficulties should proactively seek expert advice to explore options and effectively manage their restructuring efforts.

Get in touch

If your business is facing financial challenges or you need expert advice on the Insolvency and Governance Act 2020, our experienced team is here to help. Call us on 0800 246 1845 or email us at mail@leading.uk.com for a consultation. Let us guide you through the complexities and help you find the best path forward for your company.