Corporate Insolvency and Governance Act Explained

In the weeks ahead, the Government will attempt to stimulate Britain’s flagging economy with the introduction of the Corporate Insolvency and Governance Act.

The Act, which recently came into law, proposes an extensive shake-up of the insolvency regime. But exactly how will these changes affect business owners?

Well, that depends if your primary focus is:

• Chasing old debts
• Restructuring the company  

There are plenty of options available if you’re the director of a company that needs remodelling.

That’s because the Act aims to support struggling companies, and is arguably the most debtor-friendly piece of legislation ever proposed.

Once ratified, the Act will initiate sweeping amendments to the insolvency regime including the introduction of a moratorium procedure that gives distressed companies up to 40 days of protection from creditors.

It can be argued the legislation is too debtor-friendly. Furthermore, the new laws can be easily abused by a devious director who deliberately takes in as many supplies as possible knowing it’s unlikely all the company’s creditors will be paid everything they are owed.

How does the Act affect creditors?

The Corporate Insolvency and Governance Act strips away a lot of influence from creditors, including the power to serve statutory demands and issue winding-up petitions. 

In truth, Covid-19 has forced creditors to behave as they should in the first place. Now, it’s imperative they improve their credit control policies and only offer credit to customers who:

• Are solvent
• Have cash in the bank
• Have a healthy balance sheet
• Remain profitable year after year 

Larger creditors may ask for additional security such as a personal guarantee. But on the other hand, they must be careful not to apply their credit control procedures too harshly.

We’re still in a competitive market and customers can easily turn to a rival who’s willing to trade on less stringent terms.