Head of Commercial Litigation BLM
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Insolvency bill extended for distressed businesses

With restrictions on statutory demands, winding up petitions extended and a new job support scheme, have ailing businesses been handed another lifeline? Or, for many, is it simply prolonging the inevitable?

30th Sep 2020
Head of Commercial Litigation BLM
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Measures enacted under the Corporate Insolvency and Government Act 2020 to support ailing businesses will remain until 31 December 2020.

 

The government announced this extension as part of the Chancellor Winter Economy Plan, which also included the new Job Support Scheme and a new deadline for reduced VAT rate for the hospitality sector.

 

Protecting businesses in distress

The corporate insolvency statistics for August 2020 showed a significant percentage fall compared to August 2019. The view was that this was a trend that could not continue for much longer, given that extensive government support would not continue indefinitely.

With the furlough scheme coming to an end, wage bills would increase again. Loans would have to be paid back, accrued debts, tax, national insurance and pension contributions would need to be settled, in circumstances where some businesses would have had little to no income for six months and cash has become more scarce. In addition, creditors were ready to take action to recover accruing debts. Protecting businesses in distress could not go on forever.

In the meantime, consumer confidence is brittle and the signs are that sectors such as retail and airlines will only be seeing a gradual return to pre-pandemic levels of activity, assuming no further setbacks in the form of a second wave or national lockdown.

At that time, we were waiting to see if the restrictions on statutory demands and winding up proceedings, which were due to last until the end of this month, might be extended. The government has now done so, effectively extending the restrictions to 31 December 2020. This may stifle creditor action for a further three months.

Job support scheme

In addition, we have also seen the announcement of Rishi Sunak’s new Job Support Scheme, to follow the furlough scheme. Looking at the detail, it is less generous than its predecessor and some sectors, for example hospitality, are also now subject to opening restrictions.

Taking both developments together, these may buy ailing businesses a little more time to plan their way through the current crisis. It will probably, therefore, push back the expected increase in insolvencies until the beginning of 2021 onwards.

The timeframe for this sober message may have lengthened, but its severity still very much remains.

 

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