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Insolvency Protection Measures to End - Cliff Edge or Soft Landing?

03 Jun 2021

30 June 2021 has emerged as a pivotal date for businesses as the UK continues its emergence from the COVID-19 pandemic. For that is the date on which the temporary insolvency protection measures which have been in place since March 2020 are currently due to expire.

Whilst there have been previous expiry dates set – at 3 monthly intervals in the hope that the worst of the pandemic would be behind us – in each case they have been extended, often at the last minute.

What is different this time is that – given the success of the vaccination program and the progressive easing and imminent planned removal of lockdown measures – the expiry date of 30 June is (at least at the time of writing) for real.

As matters currently stand (barring any last minute announcements by the Government to the contrary) on Thursday 1 July 2021:-

  • Creditors will be able to issue statutory demands against companies that owe them money and the stringent restrictions on winding-up petitions will be lifted;
  • Landlords will be able to enforce a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent; and
  • Directors will no longer have protection against liability for wrongful trading.

There is no doubt that these temporary measures have markedly suppressed the number of corporate insolvencies during the pandemic. The latest published quarterly statistics disclose that, in the 12 months to 31 March 2021, the number of new company insolvencies declined by almost 27% compared to the preceding year (12,559 down from 17,168). The decline was particularly pronounced in compulsory (court-ordered) liquidations, down by over 54% to 1,352 from 2,945. Whilst the severe restrictions on the presentation and prosecution of winding-up petitions explains this reduction, the impact of these measures has resulted in far fewer companies entering into compulsory liquidation than would have been expected to have been the case had there been no COVID-19.

So there is considerable trepidation that the total withdrawal of the temporary measures after 30 June 2021 may create a cliff-edge in which creditors (who in many cases may be under pressure themselves) create a stampede to the Courts to present winding-up petitions to put pressure on debtor companies to settle overdue debts. This prospect will make Government nervous; having spent billions to support businesses to survive the pandemic, the danger is that a “free for all” from 1 July may stymie the recovery and damage the economy.

Does it have to be “all or nothing”? Are there measures which could be adopted – even if on a temporary basis during the recovery phase from COVID-19 – that could ease the withdrawal of the temporary insolvency measures, whilst still enabling creditors to access the Courts to present winding-up petitions in appropriate circumstances, whilst at the same time ameliorate the effects on companies – as well as the wider economy – from overly creditor tactics.

Two possible measures that may have an effect (and which could be introduced for an initial 12 month period of the recovery phase) are:

  • To protect the resources of the Official Receiver (as the liquidator of last resort) from being overwhelmed by a large number of new compulsory liquidations, to require creditors to first obtain – prior to the presentation of a winding-up petition – the consent of a licensed insolvency practitioner to act as liquidator in the event that the Court were to make a winding-up order. This measure should not however apply in the case of public interest petitions (such as those presented by the Secretary of State or the Financial Conduct Authority) where the specialist investigatory skills of the Official Receiver are required. Mandatory reporting on directors’ conduct (as in the case of all company insolvencies) will continue and the Official Receiver’s resources can be better focused on the disqualification of unfit directors and (where appropriate) the obtaining of compensation orders; and
  • To amend the law of preference (section 239 of the Insolvency Act 1986) by changing the requirement to show that the company was “influenced by a desire” to give the preference and instead substituting a more limited defence to where the creditor to whom the payment was made received it in the ordinary course of business and without reason to believe that the company was unable to pay its debts as they fell due.

Whilst these suggested measures may appear technical, they could affect overly aggressive creditor behaviour and encourage them to think carefully as to their approach. In particular a threat by a creditor to present a winding-up petition if payment of an overdue debt is not made immediately (although being legally unobjectionable) could – if such a payment was made but the company nevertheless went into administration or liquidation within the following 6 months, be set aside by the administrator or liquidator for the general benefit of all the creditors, making “hard-ball” tactics markedly less attractive than they are under the existing preference law.

In the current exceptional circumstances, to suddenly withdraw all the temporary insolvency measures – to go from “all” to “nothing” runs the risk of creating a feeding frenzy on wounded companies that are trying to re-establish themselves, to the detriment of the wider economy.

The temporary protection for directors from wrongful trading has now run its course and should expire as planned on 30 June 2021; this should act as a deterrent from directors making improper use of any continued forbearance on the part of their creditors.

If such measures were to be introduced, it should be limited to expire after 12 months, with a review undertaken as to the extent of their effectiveness after 9 months to determine whether they have had a beneficial impact on the behaviour of creditors, directors and their companies.

The objective is to encourage a more candid and transparent dialogue between both creditors and their debtor companies as to how outstanding debts can be resolved, to avoid the mutually assured destruction of the cliff-edge sudden withdrawal of the temporary insolvency measures and rather seek a soft-landing during the recovery phase as the economy reverts to (a new) normal.

For further information or advice on the matter, please contact Neil Harrold at Neil.Harrold@hay-kilner.co.uk.