The new Corporate Insolvency and Governance Act has been described as one of the most significant changes in corporate insolvency law for nearly 20 years. It looks to change the landscape of the restructuring market and heralds the resurgence of a rescue culture that focuses on rehabilitating businesses. Here, Allan Kelly, a Partner in our Restructuring Advisory team, discusses what the new act means in practice and how it might shape the coming year.
The Corporate Insolvency and Governance Act has been fast tracked through parliament at a never before seen speed, taking only six weeks to receive Royal Assent and become an official Act of Parliament. It has been designed to provide respite to companies struggling with the impact of coronavirus through temporary concessions that prevent winding up or creditor action, but more importantly enhance the options available to support business rescue.
One of the main areas of the Act to support business rescue is the new moratorium. In theory, the moratorium allows a company director to retain control whilst creditors interests are protected by the appointment of an insolvency practitioner who monitors the position and, whose duty is to ensure that a rescue continues to remain possible. It gives an initial 20 business day period that prevents creditor action to give a company’s directors the time to formulate a restructuring or turnaround plan. This is so they can try and preserve the business as a going concern either solvently, through a Company Voluntary Arrangement, or via a restructuring plan. In reality, it is undoubtedly much more complicated than this and it will be interesting to see how the Act and legal precedence’s unfold when put into practice, and indeed how practical and costly an option it really is.
For those businesses that are facing stress or challenges and are considering their options in light of the new insolvency laws, our advice would be to remain as agile as possible. The political landscape in the lead up to this year was uncertain and for many firms the pandemic will feel like another blow. However, we know just how resilient and creative UK businesses can be when faced with adversity. If your business has the capacity to be able to switch focus, streamline its model, and diversify into profitable new income streams, it will stand in good stead for the economic trials that may lie ahead.
It’s impossible to overstate the importance of planning ahead, as difficult as that may seem at the moment. Historic performance metrics are unlikely to have the same impact or relevance, especially when the overall operating environment remains fluid. To stay prepared, management teams should look at whether their current reporting and key performance indicators (KPIs) remain useful, or ask if new KPIs are needed.
Cash always remains king but longer term forecasting can be very unpredictable at present, so a 13-week cashflow is a tool that can help management teams to manage cash, predict short term issues, and build a cash runway. Cash flows need to be living documents and a cash culture should be created within businesses so all employees understand how their own role influences cash and working capital.
For some family firms, which have been operating successfully in much the same way for a long time, this may feel like a huge shift, but it is important to invite and foster different skillsets into a management team – with an emphasis on strategic financial management for the months ahead.
Businesses will also need to encourage more proactivity and curiosity when it comes to sourcing new revenue streams – creativity will be key The demand will still be there – but how do you mobilise your business to tap into it? Some may take to digitisation and find they have discovered a way to streamline their expenditure, but others may find that digitisation simply doesn’t work due to the nature of their business and will have to branch out in new and perhaps unexpected ways.
It’s also important to remember that despite the economy emerging from lockdown, businesses are not out of the woods yet. Pressure points will arise from end of Q3 2020 with rents becoming payable for the September rent quarter and landlords being able to take action for arrears, VAT repayments and the ability to progress winding up proceedings recommencing and furlough support ending. In Q2 2021, VAT deferred in the period to June 20 has to be repaid and in 12 months’ time, those businesses that have taken out Bounce Back or CBILS loans will also need to start repaying capital and interest. These factors may contribute to a series of ‘spikes and dips’ in the economy and pressure points for businesses over the months ahead. Be vigilant as whilst they may not affect your business, they still may cause issues if they impact your suppliers or customers.
It goes without saying that the provisions of the Act are well intended and as restructuring experts we will put it into practice to help protect viable businesses, but we must also remember that we are in an unprecedented situation that affects every sector of the economy. For a rescue to be successful it is not only the right legislation that is needed, but the right circumstances, the right business, a strong management team and sometimes a bit of luck!
At times like these we need people to pull together and support each other in order for businesses to be given the time to recover and return to growth, which is fundamental to the long-term success of the UK economy.
Allan Kelly is a Partner in our Restructuring Advisory team and specialises in corporate advisory including contingency planning and options reviews. If you are interested in discussing the Corporate Insolvency and Governance Act in more detail please contact Allan on email@example.com.