New corporate insolvency rules come into effect

A range of new corporate insolvency rules have come into effect after the Corporate Insolvency and Governance Act 2020 (the Act) received Royal Assent.

The Act contains a combination of permanent reforms to the corporate insolvency rules and short-term governance measures to deal with the fall-out from the Coronavirus crisis.

The new legislation was fast-tracked through Parliament amid fears that a large number of businesses will be at risk of insolvency as a consequence of the crisis.

One of the most eye-catching provisions in the Act is the introduction of a new free-standing moratorium. The free-standing moratorium will provide an extendable 20 days’ breathing space for companies from their creditors while they implement rescue measures, including restructuring and seeking new investment.

Under these provisions, the existing directors would be able to continue running the company themselves, overseen by a ‘monitor’ in the form of a licensed insolvency practitioner.

Companies are generally eligible for a free-standing moratorium unless one of a limited set of exclusions applies.

To enter a free-standing moratorium, directors must confirm that the company either is or is likely to be unable to pay its debts.

The monitor must also make a statement confirming that a moratorium would be likely to bring about the rescue of a company as a going concern.

Crucially, suppliers must still be paid during a moratorium and failing to do so can lead to the monitor cancelling the contract or ending the moratorium.

The temporary measures in the Act have been in place for some time and are provided for retrospectively.

This includes the temporary relief from winding-up petitions until 30 September 2020 and relief from wrongful trading measures.