The Corporate Insolvency and Governance Act (CIGA) became law on 25 June 2020. The act was designed to give companies which are facing insolvency the breathing space to turn things around. The changes outlined in the CIGA were initially put forward in 2016 but have been fast-tracked due to COVID-19. In this article, we’ll discuss how your business may be affected if one of your debtors applies for a moratorium under the new laws.
What has changed under the CIGA?
Under the new law, if a company is unable to pay its debts the director can apply to an independent insolvency practitioner (or ‘monitor’) who will make a judgement about whether or not it is possible to rescue the company from insolvency. If the monitor believes that the company can be saved, they can apply for a moratorium, which will temporarily protect the company from winding-up proceedings.
What is a moratorium?
A moratorium is a debt-holiday designed to give struggling companies the breathing space to restructure in the hope of recovery. Under the CIGA, companies can apply for an initial debt-holiday of 20-days. This period can be extended by up to 12 months with the consent of the company’s creditors or the courts. If the company puts forward a restructuring plan or CVA, the moratorium might be extended until the plan has been reviewed. The moratorium will be cut short if a recovery plan is approved or if the monitor decides the company cannot be saved.
How the CIGA affects creditors
If one of your debtors enters a moratorium period, you will be informed by the director of the company. Until the moratorium is over, you will not be allowed to commence an insolvency process to recover what is owed to you.During this period, you must keep to your contractual obligations to deliver goods/services to your debtor and you cannot change your payment terms or demand payment of debts that occurred prior to the moratorium period. You also cannot repossess goods. This is to give your debtors the opportunity to fulfil their obligations to customers as they attempt a recovery.
As an example, if you supply food to a pub that has come into difficulty due to COVID-19, the moratorium will temporarily prevent you from refusing to deliver goods that you are contracted to deliver or demanding payment of debts through a winding-up notice. This is to prevent suppliers from forcing the pub into liquidation before it has had a chance to recover from the impact of COVID-19. However, the pub is obliged to pay suppliers for goods delivered during the moratorium period, so you will not be expected to deliver additional goods on credit.
Debts excluded from the moratorium
There are some debts that companies are still obliged to pay during the moratorium, these include:
• Goods and services delivered during the moratorium period
• Rent accrued during the moratorium period
• Employee wages
• Redundancy packages
• The monitor’s fees
• Financial service debts, including loan agreements
Terminating your contract during a moratorium period
Although you do not have the right to terminate a contract on the grounds of insolvency during the moratorium period, you can terminate on other grounds, including non-payment and breach of contract. In addition, if your business has been affected by COVID-19 and you are concerned that by continuing to supply a company in their moratorium period your business will be put at risk, you can apply to the courts and request a termination of your contract.
If you are a smaller supplier with a turnover of less than £10.2m and under 50 employees, you are exempt from the new laws and are free to terminate your contract with companies during their moratorium. Details are outlined on this government page.
It’s important to remember that the CIGA is designed to help struggling businesses to recover. So, as long as you aren’t putting your own business at risk, it might make sense to continue with your contractual obligations on the understanding that your debtor will either continue trading as normal once the moratorium ends or go into insolvency, at which point you can collect your debts.
Restrictions during the moratorium period that may affect creditors
Once in a moratorium period, a company cannot ask suppliers for credit of more than £500, unless the supplier is aware of the moratorium and happy to proceed. Companies also may not make payments of more than £5000 on their pre-moratorium debts, unless the monitor consents to the payments or they are ordered to make payments by the courts.
What happens if one of your debtors becomes insolvent subsequent to a moratorium?
If the monitor determines that there is no viable rescue plan for the struggling company, an insolvency process will resume. Debts accrued during the moratorium period and priority pre-moratorium debts will be given precedence. Outstanding debts from unsecured creditors will be paid after the insolvency practitioner’s fees, preferred creditors and floating charge holders are paid. As with all insolvency processes, there is a risk that not all outstanding creditors will be remunerated.
Bad debt protection and invoice finance
If you are considering invoice finance (advancing money on your unpaid invoices) or if your company is heavily reliant on a handful of clients, bad debt protection can offer you some security against the risk of insolvent customers. Especially when dealing with high-risk clients who have been affected by COVID-19. You can use a risk insights tool (such as Satago) to determine your clients’ credit score and decide which could be high-risk, before opting to take out bad debt protection.
Satago is a cash management platform which syncs with your accounting software to provide risk insights, automated credit control and single invoice finance.
Satago has partnered with Nimbla to offer optional bad debt protection to platform users. To learn more, book a demo with the Satago team today.