Supplier beware – Credit control and the Corporate Insolvency and Governance Bill 2020Posted: Jul 10, 2020

Insolvency legislation rarely makes the news which is probably why one of the biggest changes to the way it works arrived recently with very little fanfare. The newly introduced Corporate Insolvency and Governance Bill 2020 was rushed through Parliament in response to the Covid-19 pandemic and makes some substantial changes to insolvency practice. They raise all sorts of questions about how insolvency works on a fundamental level, which is all very interesting to us as professionals.

If you have been following our articles and videos though, you will know that we are far more interested in the practical impact changes like this have on the SME and mid-range business market. I suspect that these changes may have far-reaching implications. To start with let’s look at what are probably the two most important changes and why they raise a few concerns.

Firstly, and returning to a subject we touched on previously, (see the link below for our earlier discussion) the new bill allows a temporary suspension of wrongful trading for the period of 01/03/2020 to the end of September 2020. In a nutshell, it means that a business could trade during that period without the usual concerns over transactions being carried out without the ability to meet obligations as they fall due. Or, in simple terms, continuing to trade when the directors knew they could not pay the company bills.

Wrongful trading can result in the directors being personally responsible for company debts. The suspension of wrongful trading is a protection measure as the impact of the pandemic would mean many businesses would unexpectedly find themselves temporarily in this position while in truth, they were still a viable business.

Secondly, there has been a rather dramatic change with the introduction of (ready for the government legal speak?) a free-standing moratorium on enforcement action. A moratorium is essentially a grace period where no further action can be taken against a business by its creditors. In this case, the moratorium period is 20 days with a possibility of an extension.

How this will work is that the directors will need to consult with an insolvency practitioner and obtain a statement. This will state that they are qualified to act for them as what is known as a monitor and that, in their initial view, the company is likely to be a going concern at the end of the period. Once they have the statement from the Monitor, along with one from the Company Directors demonstrating potential insolvency, they file with the court and the moratorium period of 20 days starts.

There are a number of other changes and if you can’t sleep at night please see the link below to the actual legislation and this will clearly help.

What does this mean practically?

So why the concern about these two changes? On the surface they seem quite reasonable and sensible and, in fairness, they probably are if they are not abused. The moratorium is not dissimilar to the system of chapter 11 in the United States, which often gives a business breathing space to get back and track, and the suspension of wrongful trading is a reasonable response to exceptional circumstances.

In both of these, the key factor is that they are there to help the business itself and not the suppliers. In the case of the moratorium, it is most applicable to larger businesses that are already notorious for long payment terms. If used wrongly this could result in SMEs who supply a business having additional time added the payment period while the buyer prepares the case for the monitor, then that would be followed by a period of 20 days (maybe more) where they could neither enforce collection nor expect to be paid.

The suspension of wrongful trading means that businesses could have been running up debts and opening new accounts and so on while effectively insolvent. There is still a chance that this could be seen as fraudulent, but you would need to prove that their actions were not a result of the Covid-19 exceptional circumstances. That seems a difficult proposition.

Either way the end result could be an extended period of non-payment resulting in severe hardship for smaller businesses.

Our advice, therefore, is not surprising. Clearly, we are not suggesting that you should suddenly install Draconian restrictions on your customers but now may be a good time to assess your credit control. It is easy to let things slip, particularly with larger customers, and for 30 days terms to become 60 and beyond. Imagine if that customer then went the moratorium route. You could easily add another month to that and probably more.

Now is a good time for a credit control audit. If you have new customers make sure they are aware of your terms and stick to them. For existing customers, maybe you could have a little chat and explain you need them to start paying in the terms again. Perhaps, if you are worried about payment, this is a good time to start exploring other options for ensuring your invoices are paid such as invoice financing or factoring or consider credit insurance?

Very few businesses could survive a sudden loss of high-income accounts or a long extension of payment terms on the back of the Covid-19 pandemic disruption and cash, as always, is King.

If you have questions about where you stand in terms of either your own insolvency or money owed to you by others, please drop us a line and will see what we can do to help.

Gavin Discussing updated insolvency situation

https://www.smartbusinessrecovery.co.uk/news/5/137/Dividends-Overdrawn-Loan-Accounts-and-Insolvency-Updated

Government legislation

https://www.legislation.gov.uk/ukpga/2020/12/contents/enacted

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