Personal Bankruptcies & Company Insolvencies Set to Surge

The government has just announced that there will be no more restrictions on most winding-up petitions, but what does this mean for individuals and businesses?

Personal Bankruptcies & Company Insolvencies Set to Surge

In recent times, the looming deadline on restrictions on serving statutory demands and presenting winding up petitions have been extended by the government, usually at the last minute. The reason given by the Treasury is to provide further reprieve for struggling businesses saddled with Covid-related debt. Whilst the 31st December 2020 passed, as did 31st March and 30th June 2021, this has not happened to the 30th September 2021 deadline.

This time there has been no extension of the temporary legislative protections and thus the general ability for creditors to issue winding-up petitions against businesses is now back in place. There will still be some limitations and safeguards for small businesses such as a de minimis limit for petitions, an initial breathing space for a response from the debtor and a restriction preventing commercial landlord petitions. These will help soften the blow for those businesses hardest hit by the global pandemic, such as those in the hospitality and leisure sectors.

There is however some good news for struggling businesses, the ban on commercial tenant evictions will continue to run until 31st March 2022. In addition, the government has indicated that landlords will be forced to go to arbitration to deal with pandemic-related rent arrears claims, assuming that they can’t reach an agreement with tenants on how to address that debt.

Corporate Insolvency and Governance Act (CIGA)

In June 2020 the government hastily rushed CIGA through Parliament, which provided some of the most significant changes to UK insolvency law in a generation. Overall, it has pretty much served its purpose, along with the Covid-19 financial support measures provided by the government and has saved many businesses and individuals from going bump.

The latest figures from the Insolvency Service show that overall numbers of company and individual insolvencies have remained low, when compared with pre-pandemic levels. While creditors voluntary liquidation (CVL) numbers have now returned to pre-pandemic levels (in August 2021 there were 1,256 CVLs, which is the highest level seen since January 2019), the statistics for other insolvency procedures, such as compulsory liquidations for companies and bankruptcies for individuals, remain much lower.

The inability of creditors to use winding up petitions against cash-starved and debt-ladened companies provided businesses with a much-needed period of breathing space. This has been lengthened by the multiple extensions of the restrictions put in place over recent months.

But now, as the UK economy continues to reopen, confidence levels begin to creep up and businesses begin to repair their stressed revenue streams, the inevitable time has come for more accountability as regards the debts built up during the course of 2020 particularly as a result of the coronavirus pandemic.

CIGA Ending Fallout: So what will happen now?

Are we likely to see a wave of petitions hitting the courts, both winding-up petitions against companies and bankruptcy petitions against individuals? The answer, I regret to say, is most definitely, yes. There is little doubt that the lifting of restrictions on petitioning will affect a swathe of businesses, both big and small, and their ability to remain afloat, with insolvency rates rising sharply in the months ahead.

Understandably, concerns have been mounting about the ramifications of ending the Covid-19 emergency support measures and whether creditors will take a more pragmatic approach to debt collection and insolvency. The reality is, having been curtailed by temporary CIGA legislation for many months, there will be a pent-up demand for the use of winding-up petitions, with numbers increasing significantly.

CIGA Ending Fallout: What exactly will change?

From 1st October creditors will once again be able to present a winding-up petition on the basis that a company or individual has failed to satisfy a statutory demand or there is other evidence that he/she/it is unable to pay its debts as they fall due.  Also, it will now no longer be necessary to consider the financial effect of Covid-19 on the business.

There are some restrictions, such as until 31st March 2022, to be able to present a petition a creditor will need to satisfy certain conditions. These include a higher level of debt with the introduction of a new £10,000 minimum threshold, notification to the company of the debt owed and the expiry of a 21-day period for the debtor company to respond with its proposals for repayment.

Finally, and in line with the continuing inability of landlords to evict commercial tenants, the temporary conditions include a ban on petitions for any amounts outstanding under a relevant business tenancy, which includes both rent and service charges.

CIGA Ending Fallout:What action will HMRC take?

The great unknown in all of this, is what attitude HMRC will take. Remember, as a result of the 2020 Finance Act, HMRC now have preference in an insolvency situation in respect of most taxes. This means that they will be promoted from ordinary unsecured creditor status to preferential creditor status in the insolvency distribution waterfall.

The major taxes, PAYE, NIC, VAT and CT (Corporation Tax) now rank ahead of both floating charge-secured debt and unsecured trade and supply creditors, whose distribution prospects in an insolvency process are now severely affected. HMRC, therefore, occupies a significantly enhanced position as a creditor in formal insolvency processes going forwards.

It is clear that the coronavirus pandemic heralded a new and unfamiliar role for HMRC, moving from the role of bad cop to good cop. They became the provider of significant taxpayer-funded support to struggling businesses and self-employed people via the CJRS and SEISS.

However, in setting out its stall in a post-pandemic world, HMRC has stated that it will “collect the tax due in a way that recognises the very real needs and challenges that businesses and individuals face”, adding that it is “mindful that some customers will remain in uncertain financial circumstances for a period of time, and we are ready to provide them with support”.

Whether or not this mindful approach will translate across the debt recovery market is very much in doubt. Most creditors (whether companies, partnerships or sole traders) are under pressure to retrieve debts owed to them and are unlikely to recognise the ‘very real needs’ of struggling businesses. As such, the message is clear: now is the time for debtor companies to start engaging with their major creditors to agree ways of restructuring and addressing their liabilities now that the returning threat of winding-up petitions is both very real and imminent.