Changes business owners need to know about as the economy re-opens

With a roadmap now in place to take us out of this lockdown, it seems likely that in the weeks and months ahead, the various government support measures in place will begin to disappear.

As that happens, the pace of change to the various rules, regulation and legislation, will pick up again.

Ross Webb, a Partner in our Insolvency and Corporate Recovery division, looks at what business owners and directors need to be aware of.

I’m going to look some of the key measures designed to suppress the financial impact of the pandemic on individuals and businesses alike.  

And if we look at some of the figures, it would seem these measures have, so far, been successful. If we cast our minds back 12 months, the view was that there would be a flood of insolvencies in Q3 and Q4 of 2020. 

Instead, what we witnessed was unprecedented financial assistance from government, which coupled with creditor forbearance has resulted in a dramatic reduction in the number of formal insolvency appointments – a trend which has continued into 2021.

Recent figures released by the Accountant in Bankruptcy for the period March 2020 to February 2021 show that personal insolvencies are down by around 48% in the previous 12 months.  We also know that that corporate insolvency appointments have reduced significantly – down up to 50% on 2019.  

There are, however, a record number of companies showing distress across a number of key indicators – with companies in sectors such professional services, construction, retail, leisure and hospitality, most affected.

With this in mind, I thought it would be helpful to look at some key measures that are likely to be subject to further change over the coming months.

Corporate Insolvency and Governance Act 2020 

On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (AKA CIGA) came into force, introducing both far-reaching reforms to the UK’s restructuring toolbox, as well as temporary measures dealing with Covid-19 impacts on companies.

These had been due to expire at the end of March. However, the government has announced that it intends to extend its power to make temporary amendments or modify the effects of corporate insolvency and governance legislation for an additional year – this would appear to be an indication that the date may be extended.

The two most significant temporary measures for companies facing financial difficulties as a result of the pandemic were:

1. Temporary suspension of the use of statutory demands and winding up petitions - the prohibition on creditors from filing statutory demands and winding up petitions for Covid related debts was extended originally to 31 December 2020 but had been extended further to 20 June 2021.
2. Suspension of personal liability for wrongful trading, initially until 30 September 2020.

The wrongful trading suspension lapsed on 30th September but was re-introduced on 26 November to last until 30 April 2021 pursuant to The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of Relevant Period) Regulations. 

Pre-covid, a director could be liable for additional debt incurred by the company from the time they knew or ought to have known that the company could not avoid insolvent liquidation or administration. The current rules mean that this has been relaxed. 

These changes are controversial as many believe they are open to abuse by unscrupulous directors whose businesses were insolvent before the pandemic. 

It is also worth noting that the reintroduced suspension of wrongful trading is not retrospective and therefore directors could be responsible for any worsening of financial condition between the end of the first suspension on 30 September and the 26 November when the second suspension started.  

It will be an interesting forensic exercise to try and pinpoint wrongful trading to that narrow window – but no doubt someone will be up for trying! 

CIGA provided that the temporary periods can be extended but not later than 5 April 2021. We will have to see what happens over the coming weeks as these measure are due to time out.  

Personal insolvency thresholds 

The threshold for sequestration was increased by amendment to section 7 of the Bankruptcy (Scotland) Act 2106 from £3,500, to £10,000 in May 2020 by the Coronavirus (Scotland) (No.2) Act 2020. 

Irritancy of commercial leases

The Code sets out a four key principles that parties are encouraged to adhere to in their interactions during the COVID-19 pandemic, which are:

• Transparency and Collaboration
• A Unified Approach
• Government Support
• Acting Reasonably and Responsibly

This has been a really useful tool which in my experience has allowed for the conversation to be taken away from the back and white contractual terms of the lease and allow parties to have a more open discussion in light of points 1-4 above. 

Click here if you would like to speak to Ross about any of the matters covered in this article.