Insolvency reforms could help co-ops survive crisis
Government has introduced new insolvency legislation to give businesses in distress more opportunities to turn things around.
Policy success around insolvency reforms
Following successful lobbying by Co-operatives UK, these reforms now apply to co-operative and community benefit societies as well as companies.
> Download our guidance for societies facing financial strife
Summary of changes
- A new moratorium period for financially distressed businesses, during which time directors remain in control and creditors cannot take action against them
- A new restructuring procedure, which would allow a business to bind all creditors, including junior classes of creditors, even if they vote against the plan
- A prohibition of 'ipso facto' termination clauses in business supply contracts, whereby suppliers terminate supply contracts on the grounds that their customer has entered a formal insolvency procedure. This is intended as a means of enabling businesses in distress to trade out of their difficulties
- A temporary period of added protection against winding up petitions and orders if coronavirus has had a legitimate financial impact on the society, now running until 30 June 2021
- A temporary relaxation of wrongful trading rules applying from 1 March 2020 to 30 September 2020 and 26 November 2020 to 30 June 2021, removing the threat of personal liability for directors who continue to trade a business through the pandemic where its uncertain that they can avoid insolvency in the future
- A temporary period of relaxation of the normal rules for entering a moratorium, now running until 30 September 2021
These measures will increase the chances that co-ops in financial distress survive.
With invaluable input from experts, we have worked closely with government and officials to ensure measures originally designed for companies are carefully modified for societies, where necessary. In this, we have prioritised the preservation of co-operative and community purpose and democratic member control.
Guidance for societies
On 28 March 2020 the Business Secretary announced that government would be fast-tracking planned reforms of UK insolvency law (the moratorium, new restructuring procedure and termination prohibition), to give struggling companies more chance of survival.
Co-operatives UK was encouraging government to include societies in its planned reforms before the pandemic. After the 28 March announcement, we intervened to ensure societies were included in the fast-tracked process.
We consulted with key experts and stakeholders, to understand the views of the sector and to help government identify where measures for companies needed modifications when applied to societies.
> Read our position paper for government here
The legislative process
For companies, all these changes were introduced through the Corporate Insolvency and Governance Bill, which was introduced in Parliament on 20 May 2020.
Government carried out extra legislative work to adapt these changes for societies, which was introduced on 18 July 2020