Government to end temporary insolvency measures

The Insolvency Service has announced that temporary measures introduced last year to help viable businesses avoid being forced into unnecessary insolvency during the COVID-19 pandemic will be phased out from October 1. The end of the previous legislation will occur alongside the introduction of new measures to help businesses recover.

The Corporate Insolvency and Governance Act, which came into force in June 2020, introduced several temporary measures designed to help businesses through the COVID-19 crisis. These included temporary changes to prevent statutory demands and winding up petitions, as well as the suspension of wrongful trading provisions.

During the COVID-19 pandemic, measures such as the Corporate Insolvency and Governance Act, along with government financial support, have caused a sharp decline in administrations and insolvencies. According to one analysis of government figures, UK corporate insolvencies fell by more than half in the first half of this year (301), compared to the same period in 2020 (655).

While such measures have undoubtedly helped many viable businesses survive the pandemic, they have also led to fears that “zombie” companies are being kept alive solely by government support. This has prompted forecasts that the withdrawal of measures such as government-backed financing and insolvency protection, alongside the debts accrued by businesses from government loans and rent arrears, could cause a huge wave of company insolvencies.

Indeed, the second quarter of this year saw a 31 per cent increase in insolvencies compared to Q1, coinciding with the first repayments being due for the Bounce Back scheme and Coronavirus Business Interruption Loan Scheme (CBILS).

As the government looks to continue to support businesses recover from the pandemic, it will introduce new temporary protections as the old measures are phased out. The new measures, which will be in place until March 31 2022, are intended to help smaller companies trade their way to an improved financial situation by giving them more time before creditors can take action.

Under the new legislation, the current debt threshold for the issuing of a winding up petition will be temporarily increased to £10,000 or more, protecting businesses from creditors that insist on repayment of smaller debts.

Secondly, creditors will be required to seek proposals regarding repayment from debtor businesses, with the business being given 21 days to respond before the creditor can proceed with a winding-up order.

Additionally, the restriction on winding up petitions with regard to commercial rent will continue, in line with the government’s previous announcement that commercial tenants will continue to receive protection from eviction up to March 31 2022. This will give the government time to implement a rent arbitration scheme to deal with the vast commercial rent debts that have been accrued since the start of the pandemic.

Despite these new measures, it seems likely that the phasing out of the old protections could lead to a potentially significant uptick in UK company insolvencies over the coming months.

Regarding the end of temporary insolvency measures, Business Minister Lord Callahan commented: “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 protections will help them to do that.”


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