The Government is to end temporary insolvency measures for UK companies post Covid-19

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The Government is to end temporary insolvency measures for UK companies post Covid-19

22nd September 2021

The government has announced that from 1 October 2021 it will be phasing out the temporary measures that were brought in to protect businesses from insolvency during the Covid-19 crisis.

The measures were introduced in June last year in the Corporate Insolvency and Governance Act 2020 to prevent businesses that were essentially viable from being lost during periods of enforced lockdown. The Act included temporary protection from statutory demands and winding up petitions and the suspension of wrongful trading rules.

Figures have revealed that while the legislation has helped businesses to survive, it may also have allowed so-called ‘zombie’ or unviable businesses to carry on, despite having no hope of long-term survival. It has been estimated that corporate insolvencies fell by over half in the first half of 2021 compared to the same period in 2020.

As trading returns to normal, the protections will be removed, which is likely to cause a wave of insolvencies. There has already been an increase, with the second quarter of this year showing a 31 per cent rise in insolvencies over the first quarter, at the same time as the first payments became due under the Bounce Back scheme and the Coronavirus Business Interruption Loan Scheme or CBILS.

The new temporary legislation is designed to be of particular help to the high streets as well as the hospitality and leisure sectors, which suffered the most during the lockdowns.

The introduction of new legislation

The new rules will last until 31 March 2022 to allow businesses the time to adjust and return to profitability before they will be exposed to creditor action. The measures include the following:

  • The debt threshold will be raised to £10,000 before a winding-up petition can be made. This is to stop creditors who are owed relatively small amounts from pursuing winding up.
  • Creditors will also be bound to ask the debtor to make proposals for payment, with 21 days allowed for a response before action can be taken in respect of winding up.
  • With regard to commercial rent, the existing restriction on winding up action will continue, although businesses are reminded to pay rents where they can. The government had previously decided that protection from eviction for commercial tenants will last until 31 March 2022. A rent arbitration scheme is likely to be prepared ready for that date, to deal with the large number of commercial rents that are likely to be overdue, with many outstanding since the start of the pandemic.

Business Minister Lord Callanan said: “The success of our vaccine rollout means we are seeing life and the economy returning to normal with a strong rebound, and the time is right to lift the insolvency restrictions that were needed during the pandemic. “At the same time, we know many smaller businesses are rebuilding their balance sheets and reserves, and some will need more time to get back on their feet. These new measures … will help them to do that.”

The next steps

For businesses who are either facing the end of the period of moratorium or who are owed money, it is time to start planning a strategy for the coming year. Having a plan of action will help ensure that you are not left struggling to deal with issues at the last minute.

With courts likely to be overwhelmed when the restrictions on winding up end, it will pay to deal with matters in a different way wherever possible. Communication is often key to finding an acceptable resolution. Negotiating realistic repayment plans could benefit both parties, with debtors avoiding the risk of winding up and creditors receiving regular money without the need to bring legal proceedings, which could prove time-consuming and lengthy in the current climate.

It is also a possibility that bringing legal proceedings for outstanding rent could be deemed to be against the spirit of proposed new legislation for recovery of arrears, with the possibility that a landlord could be penalised.

For negotiation to work, both parties will need to approach the situation pragmatically. While a creditor may be owed money, it may simply not be available. Working together and avoiding protracted disputes wherever possible is usually far preferable to the alternatives.

An experienced commercial dispute resolution solicitor will be able to help you find a solution that is acceptable to both parties or, where this proves impossible, will be able to guide you through an alternative dispute resolution process, where a neutral mediator or adjudicator will work with you to find a mutually agreeable outcome.

Overdue commercial rent

Overdue commercial rent is clearly going to be one of the biggest issues for many businesses. The government has indicated that it intends to ringfence rent debt that accrued during the pandemic because of lockdowns. This is so that the ringfenced debt can be dealt with separately by landlords and tenants, allowing payment of subsequent rent to continue without difficulties of apportionment or worries about eviction in the short term.

The ringfenced pandemic debt will be required to be negotiated by landlord and tenant, with the hope that landlords will waive or defer at least some of the outstanding rent. If negotiations fail, then the idea is that as a last resort both parties will have to attend binding arbitration.

The arbitrator will look for evidence that both parties have attempted negotiations in good faith. Should it be decided that one party has not done this, the arbitrator will be able to award legal costs against them.

We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.

If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030, email us at enquiries@lincolnandrowe.com or fill in our contact form and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.

Dipesh Dosani Partner
Dipesh advises clients on a wide range of commercial disputes including breach of contract, directors’ disputes, shareholder remedies, partnership issues, professional negligence and intellectual property. He is also able to provide clients with advice on all aspects of insolvency as well as investigations including misfeasance, undervalue transactions, preferences, transactions to defraud creditors and wrongful trading.

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