Contractors, winding-up petitions are under another hold, but 'business as usual' is next

Contractors know that coronavirus lockdown is largely lifting on July 19th 2021, but in a sign that officialdom knows ‘enterprise’ to be struggling – and that potentially includes you if you’re a limited company contractor, the government has extended temporary insolvency measures right up until September, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.

Talking more technically, if I may, it’s the measures affecting covid-19 restrictions on statutory demands and winding-up petitions which have been renewed under the Corporate Insolvency and Governance Act 2020 (CIGA).

What is CIGA?

CIGA was part of the government’s response to the pandemic, designed to allow support and forbearance for companies which would otherwise have found themselves at risk of insolvency proceedings, or other enforcement action.

The most notable element of CIGA was the prohibition on creditors presenting winding-up petitions against a company which owed them money, except in circumstances where they could show that the covid-19 pandemic had not had a financial effect on the target company, or that the debt/grounds for the petition would have arisen even if the pandemic had not occurred.

As ContractorUK readers will appreciate, the above was a heavy burden to discharge and there has been a huge drop in winding-up hearings since the onset of the pandemic.

What is the insolvency aid which has been extended? And is this extension surprising?

Most provisions of CIGA were due to conclude on June 30th 2021. However, the government announced about two weeks prior to that conclusion that some provisions were to be extended to September 30th 2021. Crucially, the measures extended include the prohibition on presenting winding-up petitions.

This extension of a hold on winding-up petitions did not come as much of a surprise to us in the insolvency profession. After all, we had both the delay to the government’s ‘unlocking’ restrictions roadmap, and the disparity between the June 30th cut-off and the date which the furlough scheme is due to end (September 30th 2021). It seemed odd that there would have been a scenario where the government deemed wage support to be necessary for businesses, but not protection from enforcement action!

Were all business life-raft measures extended?

No, as was touched upon in my previous article, there are some notable exceptions to the extension. Most crucially for directors of limited companies, Wrongful Trading is back.

While it was not immediately clear, (since the government’s official announcement appeared to be silent on it) it has now been confirmed that the temporary exemption from liability for directors for wrongful trading came to an end on June 30th 2021. This means that directors can be held personally liable for any losses which are incurred by a company in a period during which they knew, or ought to have concluded, that the company had no prospect of avoiding insolvent liquidation.

In practice, this means that if any directors consider that there is no reasonable likelihood of their limited company recovering from its current financial state, they should take professional advice from a licensed Insolvency Practitioner. If they fail to do so, they may find themselves liable to pay personally for further losses, and also potentially director disqualification proceedings. 

Is there still covid support for ‘crucial’ services suppliers, and what about tenants?

Another CIGA protection which was not extended was the temporary exclusion for ‘small’ suppliers which had enabled them to terminate supplies to insolvent companies.  This came to an end on June 30th 2021, meaning that small suppliers of ‘crucial’ services can once more be compelled to supply to insolvent clients, without the ability to insist on arrears being paid.

In addition, outside of CIGA, but potentially relevant to some contractors, a prohibition on commercial landlords being able to bring possession/forfeiture proceedings has been extended to March 2022. 

This has left commercial landlords in the unenviable position that they will be unable to seek to repossess properties until such time as (in many cases) up to two years of rent is overdue and unpaid.  Furthermore, the Commercial Rent Arrears Recovery (CRAR) procedure, which allows a landlord to take control of a tenant’s goods to recover rent can only now be invoked once rent is unpaid for 554 days.  This effectively means that rent can be unpaid from the onset of the pandemic to the end of September 2021 before CRAR action can be taken by a landlord.

Are further covid support extensions, or even new props, likely for enterprise?

It is certainly a possibility, given the odd scenario which is due to arise on October 1st 2021 where a landlord would be unable to seek possession of their premises from a non-paying tenant, but could seek to have them liquidated by issuing a winding-up petition.

Since liquidation is a terminal insolvency event which would bring the very existence of the tenant to an end, whereas repossession would just restore the landlord to a position whereby they can re-let its property, this does seem anomalous. It is akin to being prevented from grabbing a stolen watch back from a burglar but being able to seek the death penalty against them!

Whether winding-up orders would be granted by judges in such scenarios is a question which only time will answer. But right now, it would be prudent for directors of companies with rent arrears to engage with their landlords -- and soon.

The prevailing mood music must be borne in mind however. In fact, given the reintroduction of the Wrongful Trading provisions and the gradual winding-down of the furlough scheme, clearly the government is keen for business to return to normal as soon as possible.  Oh, and if you need further convincing -- HMRC has just announced its proposed strategy for recommencing debt recovery. Therefore despite the anomalies, all the signs are that the government will resist calls for further extensions to the CIGA provisions or indeed the furlough scheme, so September might be the start of the autumn but it’s also hard to see it as anything but the end of pandemic support measures for the business community.