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The Corporate Insolvency & Governance Act (CIGA) – Can this new act provide failing businesses a much needed lifeline?

Reasons to choose Wilson Browne

In March millions of businesses were faced with the unpleasant decision to have to close their doors and abruptly stop trading when the effects of Covid-19 brought the UK into lockdown. With restrictive measures remaining in place longer than anticipated, businesses were forced to adapt their services to survive. Some managed this efficiently, however there are others that are now facing the prospect of insolvency. To help ease the burden on these companies, her Majesty’s Government introduced the Corporate Insolvency & Governance Act (“CIGA”), coming into force at the end of June.

How does CIGA work?

The introduction of the CIGA has temporarily suspended parts of the existing insolvency law, providing greater protection to directors of companies that are currently trading as insolvent. The CIGA introduces new corporate restructuring tools such as;

  • Stopping suppliers from withdrawing goods or changing contractual terms,
  • Temporarily suspend liquidators and administrators from being able to bring claims for wrongful trading,
  • And granting time extensions for Companies House.

This will help directors to continue trading without fear of legal repercussions.

How will companies benefit?

Insolvent companies or companies that are likely to become insolvent can obtain a 20 business day moratorium period which will allow viable businesses time to restructure or seek new investment, free from creditor action. In order to obtain the benefit of the moratorium, the directors will need to make a statement that the company is, or is likely to become unable to pay its debts. A moratorium must be overseen by a ‘monitor’, who must be a licensed insolvency practitioner and whose role will be limited to ensuring that the company complies with the requirements of the moratorium. This will then leave the directors in charge of the day-to-day running of the business.

There have been concerns that the CIGA was rushed through Parliament and could therefore lead to undesirable consequences. It is argued that for example, the CIGA could encourage corporate failure, exploitation and let those directly responsible get off the hook. With no legal action able to be brought against a company without leave of the court, it is argued that it will be the creditors who will have to bear the loss, whilst still continuing to supply struggling companies.

Nevertheless, with the current state of the UK economy, it is hoped this will give businesses much needed relief and support to help weather the current financial situation.

Rebecca Bird

Posted:

Rebecca Bird

Paralegal

Rebecca is a Paralegal in our Company & Commercial Team based at our Northampton  office. She assists our senior fee earners in dealing with acquisitions and disposals, mergers and corporate reorganisations, management buy-outs, commercial agreements, shareholder disputes, corporate finance and legal formations. Rebecca is currently studying…