Withdrawal of temporary insolvency winding up measures

A number of temporary measures and restrictions on creditors were implemented by the UK government at the outset of the Covid-19 pandemic in order to prevent businesses being forced into insolvency due to the impact of various lockdowns and social distancing measures on the economy.

The Corporate Insolvency and Governance Act 2020 (Coronavirus) regulations implemented the suspension of statutory demands and winding up petitions by creditors unless creditors could demonstrate that Covid-19 had no impact on the company’s finances and the company would have been unable to pay its debts even if Covid-19 had no effect on the company’s finances.

As the economy begins to recover, the original temporary measures have been officially withdrawn and new temporary measures have been put in place to ease the impact of the withdrawal and to prevent the wave of insolvencies that was initially anticipated when the pandemic hit in March 2020.

From 1 October 2021, new legislation through the Corporate Insolvency and Governance Act 2020 means that the debt threshold for creditor action via statutory demands and winding up petitions has now increased to £10,000, from £750, and creditors are required to seek repayment proposals from a debtor giving 21 days for a response before they can proceed with winding up action. These new temporary measures are in force until 31 March 2022.

In addition, the debt must not be an excluded debt which means that no action can be brought for business tenancy arrears.

The number of company insolvencies registered Scotland, England & Wales in October 2021 was 1,473 which is c60% higher than the number registered in October 2020,which was in the midst of the pandemic with restrictions in place. However, this is actually lower than the 1,516 company insolvencies registered in September 2021 which shows there has not been an immediate and rapid increase in winding up orders since the new temporary measure came into force.

Although the year on year increase is a concern, it is not at a level which would qualify for the restructuring industry to report of a tsunami of insolvencies but may be a sign that insolvencies are moving back toward their ‘natural’ level after being at a record low.

That said, it remains early days and the full impact of the withdrawal of the temporary measures remains to be seen. As business rental arrears continue to accrue, landlords will be awaiting their chance to commence action. In addition, there continues to be significant pressures to businesses such as cost increases to materials and goods caused by rising inflation, pressure caused by staff and HGV driver shortages, initial complications caused by Brexit and the possibility of interest rates rising in 2022, all which will bring their own challenges notwithstanding the return of creditor action. It will be interesting to see what 2022 brings; whether the measures have been a success resulting in a normal level of insolvencies or whether the wave of some degree will hit after all.

If you are facing creditor action or are struggling for any reason, then the earlier you speak to an advisor, the better the potential outcome will be. Please contact the R2 team at AAB, on a ‘no obligation’ basis, who can discuss the options available to you and work with you to find the best solution to fit your particular circumstances.