Insolvency cases set to rise as temporary support measures expire

Businesses that have been held up by the government’s temporary pandemic support measures could soon face liquidation as the insolvency regime for UK businesses returns to its pre-pandemic system, according to insolvency specialists.

“Some businesses have been kept alive for two years by furlough, coronavirus business interruption loans and bounce back loans and the additional barriers put in place before their creditors could use the compulsory liquidation process,” says Michael Pallott, partner – restructuring services – at Mazars.

These businesses will reach “the end of the road” in the coming months, he adds.

Similarly, Jonathan Amor, insolvency partner at Azets, says the last twelve months have seen very low insolvency cases, resulting in a natural build-up of companies that should have gone insolvent but haven’t.

According to the Insolvency Service, the spike in compulsory insolvencies is already evident as figures for both January and February are almost double those recorded in the same period of last year. However, both months remain under the pre-pandemic figures.

Similarly, international tax, audit and advisory firm Mazars noted figures in compulsory liquidations had surged 76% in the last three months from 139 to 245, with many more likely to be coming as businesses face new challenges, according to Pallot.

The changes to the UK insolvency regime will now mean creditors owed £750 or more will be able to instigate insolvency proceedings in submitting winding-up petitions against businesses – this figure was raised to £10,000 under the temporary measures that expired on April 1.

However, while insolvency numbers will increase in the near-term, a “tsunami” of insolvencies is still a way off, says Amor.

“There may be a huge uptick in winding up petitions but for actual liquidation’s the numbers might not reflect that because there will be a backlog in the system as the court system won’t be able to cope with the volume.”

The biggest problem for businesses at the moment is not the lack of measures to protect them from insolvency, says Amor. Companies now face the challenge of labour shortages and supply chain issues which are forcing businesses to contend with rising prices.

Another now-expired measure that was introduced was a ban on commercial landlord evictions and restrictions on exercising commercial rent debt recovery. The government has since introduced the Commercial Rent (Coronavirus) Act 2022, on March 24, to make it harder for commercial evictions.

The law means a legally binding arbitration process will be available for eligible commercial landlords and tenants who have not reached an agreement in relation to remaining commercial rent debt accrued due to the pandemic.

The introduction of the new law will hopefully see less insolvencies as landlords are typically the biggest drivers of insolvency in winding-up petitions to HMRC, says Amor.

Alongside the temporary easements that were made to the Corporate Insolvency and Governance Act, new permanent company restructuring tools for insolvency practitioners to use were introduced to rescue vulnerable businesses.

This includes a new debtor-in-possession moratorium that provides companies with an extendable 20 working day period to give businesses space from creditor action while they seek professional restricting advice.

It also introduced a new restructuring plan for companies that has the ability to bind creditors to it and extended the suspension of termination clauses when a company enters into an insolvency procedure.

The rescue tools can be used for both large companies and SMEs, says Amor.

“As we come out of the pandemic and people can see the future is a bit more certain then these tools will be used a lot more,” he adds.

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