What Does the UK’s Post-COVID Finances Hold for Recovery & Insolvency?
According to Rishi Sunak’s budget in March, the shock of the pandemic is becoming clear, estimated to have reduced GDP by as much as 10% in 2020.
The latest figures from the Monthly Insolvency Statistics report registered that company insolvencies in May 2021 was 1,011, which was 7% higher than the number registered in the same month in the previous year (946 in May 2020).
We are seeing the impact of an activist government supporting businesses across two fronts – financial support and temporary suspension of pre-existing corporate insolvency and governance legislation.
Insolvency protection extended
In a critical move the Corporate Insolvency and Governance Act 2020 (CIGA 2020), which received assent in June 2020, comprised of eight permanent and temporary measures intended to give struggling businesses a pandemic lifeline.
The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021 has extended key measures in different ways:
- The suspension of liability for wrongful trading has been extended until 30 June 2021 for directors who continue to trade a company through the pandemic with uncertainty as to whether their company may avoid future insolvency.
- The prohibition on termination clauses is also extended until 30 June 2021, although small suppliers will remain exempted from obligation to supply.
- The relaxation of entry requirements into new moratorium procedure is also extended, in this instance until 30 September 2021.
- The continuation of restrictions on statutory demands and winding-up petitions until 30 June 2021.
One key measure is continuing with temporary suspension of wrongful trading, which provided company directors with much-needed breathing space. However, on a more cautionary note, they must keep in mind all sources of risk and liability under the Insolvency Act 1986 are unaffected by the Act. For example, directors are still bound by fiduciary duties and fraudulent trading provisions of Section 213, facing sanctions and penalties if they knowingly attempt to defraud company or creditors.
In addition, directors have duties under the Companies Act 2006 and must continue to act and be mindful of the interests of creditors if the likelihood of insolvency increases.
If directors are worried their business is in or expecting financial difficulty, it is crucial that they continue to consider the needs of all key stakeholders and creditors in any decision and maintain ‘good housekeeping’ in the form of board meetings and keeping records of actions taken with an assessment of the reasons for certain decisions.
What does this extension mean?
Overall, temporary suspension of wrongful trading doesn’t change the attention directors should be giving when evaluating their company’s financial position. Directors’ actions will remain subject to scrutiny, making it critical they consider very cautiously whether to continue trading if there is no realistic chance of avoiding insolvency.
The initial extension provisions in relation to filing deadlines no longer applies. The Act had granted automatic extensions for filing deadlines between 27 June 2020 and 5 April 2021 to relieve burdens on companies during the pandemic, allowing them to focus all efforts on continued trading.
Landlords and commercial tenants
The Government has also published a consultation paper seeking responses and evidence from the property industry generally as to how negotiations between commercial landlords and tenants on rescheduling rent liabilities have been handled during lockdown.
The protective measures the Government introduced back in April 2020 were only ever meant to be temporary. This was a lifeline for many but now there is a significant risk for those who relied on this during the pandemic that once those protections are lifted – scheduled for June 2021 – businesses may fail when rent arrears are pursued.
It is hard to envisage the government allowing a cliff edge to come into view when it has spent so long over the past year seeking to protect embattled businesses.
Although easing of lockdown measures is accelerating and businesses are beginning to open, numerous challenges lay ahead, particularly with expected long-term reduction in consumer demand and confidence. Many company directors will likely face challenging decisions whether to continue trading or instigate insolvency processes soon.
There is also pent-up private equity demand and high levels of debt funding. This desire to deploy capital, combined with what we could term a ‘flight to quality’, mixed the optimism as a result of the vaccine programme, as well as near-record levels of corporate liquidity and a strong market for M&A, we could well see a positive market.
If directors are worried their business is in or expecting financial difficulty, it is crucial that they continue to consider the needs of all key stakeholders and creditors in any decision and maintain ‘good housekeeping’ in the form of board meetings and keeping records of actions taken with an assessment of the reasons for certain decisions. Where possible, they should also seek appropriate professional advice.