The final remaining restrictions on insolvency action introduced to protect struggling companies during the COVID-19 pandemic have been lifted.
Insolvency rules have now returned to what they were pre-pandemic. This means creditors once again have a full range of legal measures at their disposal to petition for action against businesses that fail to keep up with payments.
For businesses with outstanding debts to suppliers, banks or any other type of creditor, it is important to understand what the changes mean with regards to their own insolvency risk. The government is recommending that any business experiencing difficulties servicing their debts seeks professional insolvency advice as soon as possible.
The temporary protections were introduced as part of The Corporate Insolvency and Governance Act 2020. They included the suspension of statutory demands for payment, a freeze on personal liability enforcement against directors for wrongful trading, and restrictions on creditors being able to serve winding up petitions against companies.
These measures have gradually been phased out from summer 2021 onwards. The first to be lifted was the suspension of personal liability for wrongful trading. After initially being removed in September 2020, this measure was reintroduced in November that year, before finally ending on 30 June 2021.
Following on from that, the rules around the serving of statutory demands and winding up petitions changed in October 2021. Up until 30 September that year, creditors were not allowed to serve statutory demands for payment. Nor could they apply to the courts to have a company wound up for non-payment unless they could prove that the debtor’s inability to pay was not connected to COVID-19, or that they would have been unable to pay regardless of the pandemic.
From 1 October, creditors were once again permitted to serve statutory demands but with restrictions in place. The most significant of these was that demands could only lead to petitioning for a winding up order if the debt was £10,000 or more. In addition, creditors had to give debtors the opportunity to present a formal proposal for repayment within 21 days of a statutory demand being served.
These revised measures expired on 31 March this year and have not been renewed. That means creditors no longer have to offer a 21 day window for repayment proposals before proceeding straight to petitioning for a winding up order for non-payment. The minimum threshold for petitioning the courts also returned to the pre-pandemic level of £750.
SMEs at higher insolvency risk
The concern with the lifting of the insolvency protections is that companies are in more debt than they were before the pandemic, and trading conditions remain difficult to say the least.
According to Bank of England figures, the UK’s corporate debt burden increased by £79bn from the end of 2019 to the first quarter of 2021. While this only represents a 6% increase overall, SMEs have seen debt levels spike by an estimated 25% during the course of the pandemic.
For most of that time, businesses facing an increased debt burden have had the support of government loans to assist with cashflow, along with insolvency protections. The fear is that the return to low insolvency thresholds and the removal of COVID-related business support, coupled with high levels of debt, could spark a sharp rise in the number of small businesses facing winding up orders.
Even if your debts seem fairly low, it’s crucial to understand that non-payment could once again escalate quickly into insolvency action. If you have any concerns about your ability to service your company’s debt, contact our expert team for no obligation, free advice on how best to manage your debts today.