Covid-19 insolvency aid is ending, but limited companies can wean themselves off first

It looks like I was right to predict the start of the autumn would herald the end of covid insolvency aid for limited companies, but fortunately for any contractors in distress, the aid officially running dry on Thursday September 30th won’t make it ‘business as usual’ on Friday October 1st, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency

Contractor refresher: what is covid insolvency aid?

Following the onset of the covid-19 pandemic, the government implemented the Corporate Insolvency and Governance Act 2020 (CIGA). 

This provided a life-raft of protections for companies including forbearance with statutory filing requirements, a suspension on wrongful trading and a prohibition on creditors presenting winding-up petitions (except in very limited circumstances, notably where it could be proven that the debt did not relate to Covid).

The majority of the restrictions, such as the filing forbearance and wrongful trading provisions have gradually been wound-down, as lockdown restrictions have lifted by the government. In June, however, it was announced that the restriction on winding-up petitions would be extended to September 30th 2021.

This led to concerns in my quarters that on October 1st 2021 the floodgates would open, with a raft of petitions being immediately presented on the basis of debts which had built up throughout the pandemic. But the government has now announced that while it will stick to the September 30th winding-up of the insolvency aid, there will be no immediate return to the ‘status quo’ the following day.

What’s important about the phasing out of the insolvency aid?

Three aspects will be the ones which apply to or may interest contractors:

1. Landlords will be precluded from presenting petitions based on outstanding commercial rent;

2. The debt threshold required for a petition to be presented has been increased to £10,000;

3. Creditors will be required to seek repayment proposals and give 21 days for a response before they can proceed with a petition.

Underlying just how gradual the return to the status quo should be in the government’s eyes, The Insolvency Service has specified that these new measures will remain in place until March 31st 2022.

Do the measures make sense?

It certainly makes sense that landlords are precluded from presenting petitions on rent. As mentioned in my previous article for ContractorUK, separate to the CIGA provisions, commercial landlords are already effectively prevented from taking action in relation to unpaid rent until March 2022. It made little sense for these restrictions to continue in a scenario where a landlord could petition for the winding-up of a tenant in any event! 

The consequence, however, is that it remains the case that commercial landlords are being saddled with a substantial debt burden, and one which potentially is contributing to the reduced insolvency figures.  The government is presumably hoping that tenants will be using this period to negotiate with landlords (rather than ignore them), and is almost hoping for the best until April 1st 2022. Whether this transpires positively remains to be seen. Let’s hope that the recommencement date isn’t telling about the government’s approach!

More affecting of limited company contractors is the new debt threshold measure. It has long been considered that the standard figure of £750 is a low bar for someone to reach to be able to bring about the liquidation of a company (particularly if legal costs are being added to it). 

The new £10,000 petition-threshold, for bankruptcy too?

In recent years, the amount required to be owed before a bankruptcy petition can be presented was increased to £5,000 with no concurrent rise for companies. My current feeling is that I would not be surprised if the ‘new’ £10,000 limit remains in the long term, or at least that the threshold for winding-up petitions is brought into line with personal bankruptcy.

Finally, there are new repayment proposals. Again, this does not come as a huge surprise and given the length of time that CIGA has been in place, a further 21-day period is not going to be material in most circumstances. 

While the period is shorter (and the detail has yet to be finalised), this staggered path for creditors reminds me of the debt respite scheme which is now on offer to individuals, as it all points to an intention from the government that parties should negotiate and avoid formal proceedings where possible.  This is a worthy ideal since it will ordinarily result in the best outcome for all parties – this is advice I have given on many occasions, and again, it will serve to keep the insolvency statistics low for a government no doubt wanting to impress with statistics. Interestingly however, the very latest insolvency stats actually show an increase compared with the last year (when CIGA was fully in force).

The future

No doubt the extension of winding-up restrictions will have ruined the best laid plans of many creditors and legal advisers who were eagerly awaiting October 1st 2021, already planning to be cap in hand waiting at the floodgates! The reality is that it was always likely that there would be some amount of ‘weaning off’ the covid aid (the insolvency restrictions first introduced in April 2020), given the potential for adverse consequences.

Combined with the news of HMRC restarting their collections, it is clear that the government wants directors of limited companies to be taking positive action in relation to their debts. The number of companies out there who now owe the Revenue £10,000 must be significant, and this may have formed part of the consideration when arriving at this figure for the new debt threshold for a petition.

Finally, there will of course be cynics who say that the gradual withdrawal from insolvency aid allows directors to ‘kick the can’ further down the road, by diverting their rent to ensure that any ‘problem’ debts to other parties stay under £10,000. But I would not recommend this strategy, and clearly it would have a relatively short shelf-life in any event. 

Get in early, especially if you don’t want to be an example

So in my view, the three new measures to wean companies off insolvency aid strike a reasonable balance between potentially opening the floodgates and unduly restricting enforcement rights, as the economy returns to normality. One thing that is constant however -- if you are concerned with problem debt, or the position of your business under this new triumvirate of measures, my consistent recommendation is that you seek advice as early as possible, rather than waiting for enforcement action to follow. This is a staggered return to ‘business as normal,’ but business is normal is the ultimate goal and from the point of view of HMRC, The Insolvency Service and other government bodies, examples will need to be made.