CIGA reforms - how have they fared?

Insolvency Bitesize - October 2020

It’s been encouraging to see the industry’s reaction to the new cross-class cram down procedure. Early signs suggest it could have a bright future. If you’ve not seen our thought piece on the Part 26A Restructuring Plan already, you can read that here.

In contrast, take up of the new standalone moratorium has – anecdotally – been slow. From our discussions with many of you, the consensus seems to be that use of the procedure will likely be restricted to insolvent but viable SMEs having the support of their key financial creditors and, where relevant, their landlords.

The new restrictions on exercising insolvency termination rights in supply contracts are certainly radical and far-reaching. But, they are complex and the interplay with existing provisions covering similar ground can be confusing. We have set out a short table and flowchart later in this edition to navigate some of the issues.

The Government has, of course, extended some of the temporary provisions in CIGA:

  • the restrictions on the use of statutory demands and winding up petitions have been extended to 31 December 2020. Under CIGA, these restrictions could still be further extended to the end of March 2021 but we will, of course, have to wait and see;
  • the modifications to certain of the moratorium provisions and temporary moratorium rules will run to 30 March 2021; and
  • the small supplier exemption from the ipso facto insolvency termination clause provisions now extends to 30 March 2021.

But:

  • the temporary suspension of liability for wrongful trading has not been extended and expired on 30 September 2020; and
  • the ability of the monitor to disregard the effects of Coronavirus when considering whether the company is rescuable, or whether the moratorium should be extended or terminated, expired on 1 October 2020. As such, only a company deemed rescuable by the proposed monitor will be able to access the standalone moratorium procedure. As the Government noted, this is aimed at minimising “the risk of increasing the number of so-called zombie companies (those that have no real prospect of servicing and repaying their debts). Allowing the rescue criteria to take into account any worsening of the financial position caused by coronavirus could impede restructuring in the wider economy, leading to further damage to creditors or suppliers”.

With insolvency cases set to rise as we enter Q4 and move into 2021, we will continue to watch how the new legislation operates in practice.