Insolvency and restructuring partner Pannone Corporate
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Government calls time on most winding up restrictions

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The government has confirmed there will be no more restrictions on most winding up petitions. Richard Wolff explains what this means for businesses.

1st Oct 2021
Insolvency and restructuring partner Pannone Corporate
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We’ve been here a number of times before: the deadline on restrictions on serving statutory demands and presenting winding up petitions looms and, at the 11th hour, the government extends it, providing further reprieve for struggling businesses saddled with Covid-related debt.

While 31 December 2020 passed, as did 31 March and 30 June 2021, the same won’t be said of the 30 September 2021 deadline. This time there will be no extension of the temporary legislative protections and the general ability for creditors to issue winding up petitions against businesses will return.

There will still be some limitations and safeguards for small businesses such as a de minimis limit for petitions, an initial breathing space for a response from the debtor and a restriction preventing commercial landlord petitions. These will help soften the blow for those businesses hardest hit by the global pandemic, such as those in the hospitality and leisure sectors.

The ban on commercial tenant evictions will continue to run until March 2022. In addition, there is an indication that landlords will be forced to arbitration to deal with pandemic-related rent arrears claims, if they can't reach agreement with tenants on how to address that debt.

CIGA served a purpose

In June 2020 the government brought into force the Corporate Insolvency and Governance Act 2020 (CIGA), hastily rushed through Parliament providing some of the most significant changes to UK insolvency law in a generation.

It has at least partially served its purpose, along with the Covid-19 financial support measures provided by the government. The latest figures from the Insolvency Service show that overall numbers of company and individual insolvencies have remained low, when compared with pre-pandemic levels.

While creditors voluntary liquidation (CVL) numbers have now returned to pre-pandemic levels (in August 2021 there were 1,256 CVLs, which is the highest level seen since January 2019), the statistics for other insolvency procedures, such as compulsory liquidations for companies and bankruptcies for individuals, remain lower. 

The inability of creditors to use winding up petitions against cash-starved and debt-ladened companies provided businesses with a much-needed period of breathing space. This has been lengthened by the multiple extensions of the restrictions put in place over recent months.

Now, as the UK economy continues to reopen, confidence levels begin to creep up and businesses begin to repair their stressed revenue streams, the inevitable time has come for more accountability as regards the debts built up during the course of 2020 particularly as a result of the coronavirus pandemic.

So, what is going to happen?

Are we likely to see a wave of petitions hitting the courts? The answer is, unfortunately, yes.

Are insolvency rates going to rise sharply in the weeks and months ahead? Again, there’s little doubt the lifting of restrictions in relation to petitioning will affect a swathe of businesses and their ability to remain afloat.

Understandably, concerns have been mounting about the ramifications of ending the Covid-19 emergency support measures and whether creditors will take a more pragmatic approach to debt collection and insolvency.

The reality is, having been curtailed by temporary CIGA legislation for many months, there will be a pent-up demand for the use of winding-up petitions, whose numbers will increase significantly, and the result will undoubtedly be a corresponding rise in insolvency numbers in Q4 2021 and Q1 2022. 

What will change?

From 1 October 2021, creditors will once again be able to present a winding-up petition on the basis that a company has failed to satisfy a statutory demand or there is other evidence that it is unable to pay its debts as they fall due.

Other restrictions on winding-up petitions are also being eased significantly – it will now no longer be necessary to consider the financial effect of Covid-19 on the company.

Instead, until 31 March 2022, in order to present a petition a creditor will need to satisfy certain conditions. These include a higher level of debt with the introduction of a new £10,000 minimum threshold, notification to the company of the debt owed and the expiry of a 21-day period for the debtor company to respond with its proposals for repayment (although creditors can apply to the court for an order waiving or shortening the 21-day period).

Finally, and in line with the continuing inability of landlords to evict commercial tenants, the temporary conditions include a ban on petitions for any amounts outstanding under a relevant business tenancy (which would include both rent and service charges).

What part will HMRC play?

A key concern at the moment for insolvency and restructuring professionals is the direction of travel for HMRC. You cannot ignore the return of Crown preference when assessing the post-pandemic debt recovery and insolvency landscape.

Whatever view the insolvency industry holds about the past and recent approach by HMRC, there’s no escaping the significance of the return of secondary crown preference on 1 December 2020.

Key crown liabilities (eg PAYE, NIC and VAT) now rank ahead of both floating charge-secured debt and unsecured trade and supply creditors, whose distribution prospects in an insolvency process are now severely affected. HMRC therefore occupies a significantly enhanced position as a creditor in formal insolvency processes going forwards.

It is clear that the coronavirus pandemic heralded a new and unfamiliar role for HMRC – that of being a provider of significant taxpayer-funded support to struggling businesses and self-employed people via the CJRS and SEISS. Its change of focus at the time was notable.

However, in setting out its stall in a post-pandemic world, HMRC has stated that it will “collect the tax due in a way that recognises the very real needs and challenges that businesses and individuals face”, adding that it is “mindful that some customers will remain in uncertain financial circumstances for a period of time, and we are ready to provide them with support”.

Whether that mindful approach will translate across the debt recovery market is very much in doubt.

Most creditors (whether companies, partnerships or sole traders) are under pressure to retrieve debts owed to them and are unlikely to recognise the ‘very real needs’ of struggling businesses.

As such, the message is clear: now is the time for debtor companies to start engaging with their major creditors to agree ways of restructuring and addressing their liabilities now that the returning threat of winding-up petitions is both very real and imminent.

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