Trethowans: Are insolvencies coming to an end?

The latest Covid-19 infection rates statistics issued by the Government suggest that we may be turning the corner in terms of the impact of Covid-19 on the general public’s health, writes Robert Bajaj, Partner, Trethowans.

I have heard several people question whether these figures can be correct, and I’ve even heard one person theorise that the rate of infection is falling as a result of many individuals turning off their NHS COVID-19 app to avoid being pinged.

The latest government insolvency statistics in respect of company insolvencies issued on 30 July possibly follow a similar trend, especially when comparing the Covid-19 graph against the graph released by the Government on 30 July in respect of compulsory liquidations.

We are told that while registered company insolvencies increased in the last quarter to end June 2021, they remained lower than pre-pandemic levels. The overall numbers of company insolvencies have remained low since the start of the first UK lockdown in March 2020, when compared with pre-pandemic levels. Is this an encouraging sign, or are we theoretically turning off the app to stop being pinged?

What is more likely is the impact of the temporary restrictions on the use of statutory demands and certain winding-up petitions (leading to company compulsory liquidations), together with financial support for individuals.

At the start of the pandemic, restrictions were imposed by government legislation and regulation preventing tenants being evicted by landlords, companies owing money being wound up leading to compulsory liquidation and even directors being protected for trading whilst insolvent during this period.

The temporary restrictions on winding-up petitions brought in under the Corporate Insolvency and Governance Act 2020 (CIGA) are wider than originally envisaged when first announced by the Government in April 2020 and have now been extended until 30 September 2021.

A creditor may not present a winding-up petition until after 30 September 2021 unless it has reasonable grounds to believe that coronavirus has not had a financial effect on the debtor or the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor. It is possible that the Government could extend this restriction further. The original period of 'protection' was between 1 March and 30 September 2020 and has been extended for a year more than originally envisaged.

If, and this may be a big if, the temporary restrictions in relation to the presentation of a winding-up petition are not extended past 30 September 2021, then qualifying companies/LLPs may be able to take advantage of the more permanent provisions under CIGA, including applying for a moratorium to provide the company/ LLP with an effective breathing space in terms of payment of some of its debts and an initial period of 20 business days in which to come up with a rescue plan. This may give a company enough time to review and 'breathe' and leaves directors in charge during this period, although they are subject to a monitor who must certify the moratorium that will help rescue the company. This is not an Administration and may be less administratively burdensome.

Another option for a company/LLP may be to go through the restructuring process under CIGA. One feature of this procedure is that it enables a company to target classes of creditors and with a 75% majority of class of creditors, to drag along other creditors to an agreement in certain circumstances.

As we move into what is hopefully a new era, recent government legislation is moving much more to a rescue culture. Maybe some people will feel it’s safe to turn back on their NHS app.