By Lucy McCann, Litigation partner, Brodies LLP

While businesses across the country are opening their doors, that positive news is a sharp contrast to increasingly frequent headlines about the commercial casualties of COVID-19 – not just on the high street, but across many sectors.

Fortunately, there are options that allow struggling businesses breathing space, which can make a difference when it comes to saving a company and the jobs of its employees.

10-day breathing space

Just last week, Go Outdoors obtained relief from its creditors, by filing a notice of intention – or NOI - to appoint an administrator. 

An NOI provides the business with breathing space, known as an interim moratorium – 10 business days, during which creditors cannot take action against the business without the court's permission. 

That time allowed Go Outdoors to decide whether it needed to enter into administration and may have helped in reaching an agreement on the terms of its pre-pack sale - designed to protect jobs and provide the best outcome for its creditors.

The conditions of an NOI are:

  • It can only be filed when it's likely that the company will have to go into administration; a formal insolvency process.
  • Although repeated use is frowned upon by the courts, they can be filed more than once in very limited circumstances, to extend the relief period.
  • Once a company is in administration, the relief period granted becomes permanent and no action can be taken by creditors without the administrator or court's consent.

20-day breathing space

The UK Government has introduced a range of measures via the Corporate Insolvency and Governance Act 2020 (CIGA). The Act was passed on 25 June, although many of the measures it enacts apply retrospectively, from 1 March 2020.

Importantly, the CIGA introduces a new corporate moratorium for businesses that are on the brink of insolvency – 'breathing space' from creditors for 20 business days. 

This measure is similar to that available under the legal framework for administration and is a powerful means of protection.

The corporate moratorium offers a number of benefits, including:

  • The company gets protection, while avoiding a formal insolvency process.
  • Directors of the company remain in office and continue to be responsible for its day-to-day management. A monitor is appointed to oversee matters and ensure the business continues to meet its obligations.

Temporary relief from debt pressures

The CIGA contains measures that prevent creditors from being able to put pressure on companies to pay debts they owe, via statutory demands and winding up petitions. 

The latter cannot be served on a struggling company if it can show that COVID-19 is the reason for its inability to pay debts owed. It's worth noting that this particular measure only provides temporary relief - and will not be available indefinitely.

Early notice of action

Businesses in Scotland that are concerned about action being raised against them can lodge caveats, which provide early notice of any proceedings raised against them, including the presentation of winding up petitions.

Stakeholder support

Another option for struggling businesses is to engage with stakeholders, who may be prepared to provide additional funding, extend payment terms or compromise debts which are owed - all of which can be done without resorting to a formal insolvency process.

The opening up of the economy is undoubtedly good news, but as everyone in business knows, the road to recovery will be long - and we need to prepare for that. 

For any struggling business, the onus is on directors to always act in the interest of those parties they owe debts to. 

The CIGA and existing insolvency legislation is trying to strike the balance of protecting stakeholders, while still giving companies a fighting chance of saving their business and jobs.

This article originally appeared in Insider 


Lucy McCann