By Lucy Trott and Tim Carter
In the last 18 months, while the world shut down and COVID-19 took hold, extraordinary measures were put in place to support businesses and individuals struggling with a lack of income and ongoing bills to pay. As a (somewhat surprising) result, there has been a marked decrease in the rate of corporate insolvencies in the UK since the onset of the first lockdown. Rates have been creeping up since the end of 2020, but they are only now approaching pre-pandemic levels. Although government support has been available throughout the pandemic, those measures are now being scaled back as we settle into the ‘new normal’. Many businesses and SMEs in particular have not seen a return to the levels of profit they previously enjoyed, and are facing high amounts of historic debt which they will shortly be required to pay. Against this backdrop, we consider the latest insolvency statistics and what steps SMEs could be taking to protect their position in this difficult market.
The latest insolvency statistics
The UK’s latest quarterly company insolvency statistics covering Q3 2021 reveal a 17% increase in company insolvencies overall since the previous quarter, which is a jump of 43% from the same period in 2020.
Following the introduction of restrictions on the presentation of winding up petitions in June 2020 (under the Corporate Insolvency and Governance Act 2020), compulsory liquidations are still significantly below the levels seen even a year ago. The same is true for administrations and company voluntary arrangements (reduced 56% and 68% respectively since Q3 2020). The driving force behind the increasing levels of corporate insolvencies is the vast number of companies entering into creditors’ voluntary liquidation (CVL). So why the huge increase in CVLs in particular?
A CVL is a process instigated by company directors, who, having considered the finances of the company, have taken the decision that the company is unable to service its debts and cannot continue trading. When companies are generally struggling to pay their creditors, we might ordinarily expect an increase in creditor action and a rise in compulsory liquidations across the board to follow. While restrictions on presenting winding up petitions have eased from 1 October 2021, there has not been sufficient time for this to filter through into winding up orders being made. Commercial rent arrears remain an ‘excluded debt’ which cannot currently be pursued through winding up proceedings; however, that exclusion is due to come to an end in March 2022 when many SMEs will find themselves with huge debts, which they are simply unable to pay. Directors are therefore facing difficult decisions now as to whether their businesses will remain viable in the forthcoming months and what positive action they can take to protect their position in light of their duties.
What should businesses be doing?
First and foremost, directors should regularly review the company’s finances and carry out projections to ensure that the company is able to meet its debt obligations, both in the short and longer-term. They must hold regular board meetings, keep minutes of any discussions around company finances and document any decisions that are made. If the company does end up in an insolvency process, this will stand directors in good stead to reduce the risk of personal liability.
When dealing with problem debts, early engagement is key. As noted above, landlords cannot currently commence winding up proceedings for commercial rent arrears, but directors should consider how any arrears can be cleared and come up with a repayment plan in anticipation of the restrictions being lifted. A new rent arbitration scheme is due to be implemented from April 2022 to deal with commercial rent arrears, which is expected to assist parties in reaching a compromise in any event.
For businesses with historic tax debt, it may be possible to reach a Time to Pay arrangement with HMRC, so long as the business is otherwise viable as a going concern and able to meet its other ongoing debt obligations. HMRC has recently indicated that they do not intend to rush back to enforcement action post-pandemic, but it will take action where there is a failure to seek support or to engage with them regarding unpaid debts.
Finally, for SMEs who cannot reach agreement with their creditors and/or for those who are concerned that their business may no longer be viable, support should be sought from a licensed insolvency practitioner (“IP”) and/or insolvency lawyer, who can give advice about all the available options.
Tools at your disposal
As noted above, we await details of the widely-anticipated rent arbitration scheme, which is due to be implemented in the new year to deal with unpaid rent during the pandemic. The scheme is anticipated to include ring-fencing of “COVID arrears” accrued during periods when businesses were forced to close during lockdown, together with reductions in rent to reflect the drop in turnover for tenant businesses. The scheme is expected to strike a delicate balance based on affordability, so an early discussion with landlords is advised, where appropriate.
In terms of additional finance, the Government has just announced an extension to the recovery loans scheme (“RLS”) (until June 2022), which is specifically targeted at SMEs. From 1 January, the finance available under the extended RLS will be supported by a 70% government guarantee (rather than 80% now), and the finance available to each business under the RLS will be capped at £2m (reduced from £10m now).
For registered companies or limited partnerships in need of a short breathing space to assess their options, a Part 1A moratorium (overseen by an IP appointed as “monitor”) might be beneficial. A moratorium can be obtained through a simple court filing where the company is unable to pay its debts and the monitor certifies that the moratorium would result in rescue of the company as a going concern. A Part 1A moratorium does not prevent enforcement action by financial creditors, but could otherwise be a useful tool where the business is viable on an ongoing basis.
For any directors or businesses who are concerned about their financial position, we recommend seeking early professional advice. In some cases, rescue of the business might not be possible, in which case a CVL might be the appropriate route. However, with the number of tools and support measures still available, it may be possible to salvage the business notwithstanding the challenging financial circumstances.
About the Authors
Lucy Trott, PSL at Stevens & Bolton LLP, advises companies, insolvency practitioners, lenders and individuals on a wide range of financial issues, incorporating both corporate and personal insolvencies and issues of an international and cross-border nature.
Tim Carter, partner at Stevens & Bolton LLP, advises on all aspects of restructuring and corporate and personal insolvency, including distressed business sales. His clients range from insolvency practitioners, corporates, stakeholders and other investors to directors and individuals. He has particular expertise in matters involving insolvency litigation.