End to temporary insolvency measures comes with a 'twist' for creditors

The Insolvency Service announced yesterday (9 September) that temporary insolvency measures – brought in to protect businesses from insolvency during the pandemic – will be phased out from 1 October. However, the announcement came with a twist – the government also outlined new measures to support small business and commercial tenants. 

Companies under financial strain due to pandemic trading restrictions have been protected from creditor action since June 2020, through the Corporate Insolvency and Governance Act 2020. 

The insolvency restrictions were brought in to ensure viable businesses were not forced into insolvency unnecessarily. However, as normal trading conditions return, the restrictions on creditors will be lifted.

Business minister, Lord Callanan, 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”.

However, new measures to support smaller businesses “trade their way back to financial health” before creditors may take winding up action, were also announced.  

Until 31 March 2021, the current debt threshold for a winding up petition will be raised to £10,000 or more, which will stop creditors being able to enforce relatively small debts. The new legislation will also require creditors to seek proposals for payment from debtors, and to give debtors 21 days to respond before they can proceed with winding up action.

The government hopes this will particularly benefit the high streets, and the hospitality and leisure industry – sectors hit hardest during the pandemic. 
Lord Callanan said: “... 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”.

The government has urged businesses to pay contractual rents if they can. However, existing restrictions will remain to prevent commercial landlords from presenting winding up petitions against limited companies to repay rent arrears built up during the pandemic.

This continued restriction aligns with the fact commercial tenants will continue to be protected from eviction until 31 March 2022, while the government implements a rent arbitration scheme to deal with commercial rent debts accrued during the pandemic.

Alejandro Worthington, partner at JMW Solicitors, commented: “The £10,000 threshold is a significant increase from the £750 which has been in force till now. The bankruptcy threshold (i.e. for individual debtors) has been £5,000 for several years (previously also £750) so perhaps this is the first step towards fixing the same amount in respect of company winding up petitions.  

“Most notably, it will allow the Official Receiver and any subsequently appointed liquidators to investigate potential claims against directors and others and to realise assets for the benefit of creditors, something which has been held up significantly by the restrictions”.  

He urged creditors to “… consider their own position (e.g. contractual, security, strategic and their own cash flows) carefully given the dramatic increase in the threshold, designed to assist small companies who would not usually be expected to have any one debt of £10k or more”.  

Worthington suggested: “Creditors might, in certain extreme circumstances, wish to consider ‘clubbing together’ with other creditors to take an assignment of claims in order for at least one of them to reach the threshold, assuming this is not prohibited by any new regulations.”