U.K. Insolvency Restrictions Lifting—Hoping for Best, Preparing for Worst?

As the country went into lockdown from March 2020, the government was rightly concerned with ensuring that support measures reached people and businesses in need as quickly as possible. This led to an unprecedented level of funds being made available using new schemes and mechanisms.

Moratoriums on enforcement action included protection for directors against liabilities for wrongful trading, protection from creditors issuing statutory demands, and restrictions on issuing winding up petitions. Furthermore, landlords have been unable to enforce a right of entry or forfeiture for non-payment of rent in certain business tenancies. These measures have resulted in a clear decline of new personal and corporate insolvencies. Compulsory liquidations (those appointed by the court) were down by more than a half in the 12 months following the introduction of the government’s temporary schemes.

In early September the Insolvency Service announced that from Oct. 1, 2021, there will be a phased end to the emergency insolvency measures the government introduced at the height of the pandemic. While the majority of the restrictions under the Corporate Insolvency and Governance Act (2020) are being phased out, some in respect of commercial rent only, will remain in place until March 2022.

The announcement from the Insolvency Service also detailed a number of specific measures that will impact any creditor action. These include a temporary increase from 750 British pounds ($1,024) to 10,000 British pounds ($13,659) of the outstanding sum owed in order for a business to be deemed insolvent, as well as a requirement that creditors seek proposals for payment from a business, giving them 21 days to respond before they can proceed with a winding up action.

Concerns center around the number of winding up petitions that are stockpiled and ready to go, and how this will be managed by the courts. Will this be an issue, or will the backlog be rendered redundant with large numbers of directors finally mobilizing to place the companies into creditors voluntary liquidation—while mindful of the withdrawal of the wrongful trading reprieve—and the courts ultimately seeing voluntary liquidation as a way to facilitate a softer landing?

The attitude of creditors will be key in determining whether compulsory petitions continue, or whether they allow a voluntary process but with an active influence on the choice of liquidator.

As a means of avoiding abuse, we may also see creditors increasingly using provisional liquidators to seek immediate appointment on cases where there is a general view that the directors are seeking to dissipate assets. A provisional appointment by the court may provide creditors with the comfort that the assets of the company will be protected pending a winding up hearing.

Those companies that have been or will be dissolved will be subject to the scrutiny of the Insolvency Service, which will investigate directors of companies who have misused the dissolution process to avoid paying suppliers and other creditors such as HM Revenue and Customs.

As noted, a ban on commercial evictions remains in place until March 2022.

The extension applies to all businesses; however, the new rules will only be available to businesses that have been impacted by closures such as hotels, restaurants, and nightclubs. Those businesses that have been able to open since the lifting of restrictions are expected to pay rent. Directors again need to bear this in mind when considering their duties.

With the extension to the ban on commercial evictions until Spring 2022, many landlords will continue to feel cashflow pressures and require prolonged forbearance from their lenders in the interim, particularly for debt service covenants. Lenders have been able to enforce their security throughout the pandemic, often via Law of Property Act receivership, and we continue to see differing trends across the real estate finance spectrum with some lenders, but certainly not all, having an effective self-imposed moratorium on enforcement (albeit with some case exceptions) for reputational reasons. Broadly, we expect the level of property enforcements to remain stable for the remainder of 2021, in part limited by a surprisingly buoyant property market driven by good demand and availability of debt.

The intervention by the public sector has undoubtedly saved jobs and supported businesses throughout the course of the pandemic. However, given the amount of money involved and the speed in which the funds needed to be provided, there was inevitably a risk that these schemes would fall victim to fraud. In the U.K., the National Audit Office (NAO) estimated between 15 billion British pounds ($20.5 billion) and 26 billion pounds ($35.5 billion) in potential losses from fraud and default, although these figures were “highly uncertain.”

This systematic abuse of government support is also likely to be met with criminal investigations, arrests, and prosecutions, which are already underway to recover funds using criminal restraint and confiscation proceedings.

In addition to large scale organized crime, there will also be misuse and abuse of the schemes by those who they are aimed at. This may include individuals or companies accessing schemes they are not eligible for, misappropriating funds they have received, or seeking financial support with no intention to continue engaging in business or repaying those funds.

Not only will insolvency practitioners be expected to investigate and report on the conduct of the directors and any potential criminality, but there will also be a growing need for them to try to recover the value of any fraudulently obtained funds. Creditors will likely want insolvency practitioners to consider seeking contributions or compensation from the directors for any misfeasance or fraudulent trading; therefore, enhancing realizations and potentially allowing a route to recover funds that would otherwise have been lost from the public purse.

The Insolvency Service has already written to all insolvency practice firms advising that, “if it appears that a person has applied fraudulently” for the government-backed business interruption loan scheme and bounce back loans, “it is the duty of the insolvency practitioner to consider their reporting obligations.”

Sanctions will include disqualification from acting as a director for up to 15 years or an order to repay some or all of the money personally in compensation.

The knock-on effect for directors personally is significant. In addition to calls on personal guarantees, we are likely to see a significant increase in misfeasance and fraud claims, all seeking to recover value from directors’ personal assets. There is undoubtedly going to be a significant increase in personal insolvency levels. The attitude of creditors will largely dictate whether this is via bankruptcy or the individual voluntary arrangement (IVA) process. Where there is any suggestion of fraud or impropriety then a consensual arrangement is going to be unlikely. Creditors are going to expect to see the full range of investigative powers launched by a trustee in bankruptcy.

Directors should still consider their duties when trading and not seek to take advantage of the extended temporary measures to the detriment of their stakeholders as they could face disqualification or claims.

Now is therefore the time for all business stakeholders to carefully plan for recovery and consider all the options and tools available to them.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Faye Kelly is a director of Restructuring, Joanne Wright is a managing director of Restructuring Advisory, James Liddiment is a managing director in the Real Estate Advisory Group, and Rob Armstrong is a managing director in the Global Restructuring Advisory practice at Kroll.