The Corporate Insolvency and Government Act 2020 - A Turnaround professionals view
The recent update to the UK Corporate Insolvency and Governance Act 2020 (CIGA 2020), particularly the new moratorium and restructuring plan provide an opportunity for turnaround professionals to collaborate with insolvency practitioners (IPs) in their statutory role as monitor, to secure successful outcomes for business owners. Although the changes to the act were originally consulted on in May 2016, the most recent updates to the CIGA 2020 were brought into legislation sooner than previously planned and came into effect in June 2020. CIGA 2020 introduced both permanent and temporary measures. The temporary measures were aimed at reducing the number of businesses entering or restarting insolvency procedures during the pandemic while the permanent measures, include a free-standing moratorium, a restructuring plan process, and restrictions on termination of contracts for the supply of goods and services.
In this article, we will look at the new moratorium and how collectively as advisory professionals, turnaround professionals and IPs can work collaboratively within this new process, delivering the complementary roles of turnaround professional and ‘monitor’.
The legislation is clear. Fundamentally the moratorium is not intended to be used to postpone entry into insolvency. It should be used to allow businesses in financial distress additional time, initially 20 business days, to explore rescue options (mostly) free from creditor action. It is intended to encourage companies to act earlier to, for example, restructure debt or address operational issues and improve the company’s chances of success. Before entering the moratorium, the monitor, a licensed insolvency practitioner, is to determine the likelihood of there being a viable business, and if entering into a moratorium would legitimately give the business the breathing space required to recover. At this point, the monitor is required to assess on behalf of the directors, the businesses position, prospects, assets, liabilities and eligibility for a moratorium as well as the business as a going concern. A turnaround professional’s expertise would support the monitor in giving his/her assessment, as well as highlighting if there are major operational issues which need to be addressed to enable a successful turnaround position to be achieved. With the right skills, a turnaround professional can keep management engaged and focused on the critical decisions that enable a positive outcome as well as provide the necessary linkages to the monitor, independence and reassurance to the directors that they are in a business worth saving.
CIGA 2020 requires that moratorium debts and some pre-moratorium debts are to be paid throughout the moratorium period. In many instances, there will need to be additional investment secured if the short-term cash position is insufficient to meet these obligations. A turnaround professional in these situations, would be able to understand the position and deal with necessary matters during the moratorium. This could include addressing debt obligations, cash flow and identifying the root causes of the decline which are mission critical to the turnaround plan and how they can realistically be addressed.
Whilst it is obvious that irrespective of the underlying health of the business, if the operating cash flow cannot be secured to finance the short-term obligations of the company, it unfortunately may remain fatally wounded. If the underlying business is commercially viable, there must also be a convincing turnaround plan to demonstrate that the prospect of generating the appropriate returns in the restructured company is real. This can only be achieved through addressing the root cause of the operational difficulties and drivers which may have pushed the business into trouble in the first place. A key element of the moratorium is that the directors remain in charge with the monitor overseeing. With the introduction of a monitor there is a risk that management will feel a loss of control, and that they are ‘one foot out of the door’.
With the right skills, a turnaround professional can keep management engaged and focused on the critical decisions that enable a positive outcome as well as provide the necessary linkages to the monitor, independence and reassurance to the directors that they are in a business worth saving. The psychology of this can make a real difference.
Whilst it is yet to be widely tested, particularly in SME’s, this is a new tool and we look forward to it being fully utilised to support and save businesses at this particularly difficult time. Although there may be a number of businesses where insolvency is the only option, we hope that use of the moratorium in conjunction with credible turnaround plans result in the rescue of troubled businesses, protecting jobs, services and capital. Kingsgate is a turnaround and transformation business, specialising in operational and financial turnaround assignments using our multi-skilled team.
