The Insolvency Service has announced that temporary measures brought in to support businesses from insolvency during the pandemic will be phased out from 1st October.
Companies in financial distress as a result of the pandemic have been protected from creditor action since June last year, through the Corporate Insolvency and Governance Act 2020. This was to ensure that viable businesses affected by the restrictions on trading during the lockdown periods were not forced into insolvency unnecessarily. As the economy returns to normal trading conditions, the restrictions on creditor actions will be lifted.
New measures will be brought in to help smaller companies get back on their feet to give them more time to trade their way back to financial health before creditors can take action to wind them up. This will particularly benefit high streets, and the hospitality and leisure sectors, which were hit hardest during the pandemic.
The new legislation will:
- Protect businesses from creditors insisting on repayment of relatively small debts by temporarily raising the current debt threshold for a winding-up petition to £10,000 or more.
- Require creditors to seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with winding up action.
The measures will be in force until 31st March 2022.
Business Minister Lord Callanan said The success of our vaccine rollout means we are seeing life and the economy returning to normal with a strong rebound, and the time is right to lift the insolvency restrictions that were needed during the pandemic.”
“At the same time, we know many smaller businesses are rebuilding their balance sheets and reserves, and some will need more time to get back on their feet. These new measures protections will help them to do that.”
Businesses should pay contractual rents where they are able to do so. However, the existing restrictions will remain on commercial landlords from presenting winding-up petitions against limited companies to repay commercial rent arrears built up during the pandemic.
Continuing the restriction on winding up in respect of commercial rent only supports the announcement on 16 June that commercial tenants will continue to be protected from eviction until 31 March 2022, whilst the government implements a rent arbitration scheme to deal with commercial rent debts accrued during the pandemic.
Christina Fitzgerald, Vice President at insolvency and restructuring trade body R3 said “After 18 months of helping businesses who have borne the brunt of the economic consequences of COVID, the Government has now started the process of withdrawing its legislative support.”
“Today’s announcement shows it has chosen to taper this withdrawal rather than removing its support in one go, to reflect the opening up of the economy and the need to balance the interests of businesses with those of their creditors.”
“The end of the ban on the use of winding up petitions, along with the temporary introduction of the new £10k debt limit – increased from the original limit of £750 – will allow those who are owed significant sums of money to take action against those who owe it, while at the same time preventing viable businesses facing the threat of winding up petitions over relatively small sums of money. However, this measure won’t apply to commercial rent arrears accrued during the pandemic.”
“It is also worth noting that this is the first time the debt limit has been increased since the introduction of the Insolvency Act in 1986. While this increase will only be temporary, it’s a significant one compared to the original sum of £750. Given the challenges businesses have faced during the pandemic, the new limit is a welcome adjustment.”
“The new requirement for creditors to seek repayment proposals from debtor businesses, before being able to take winding up action, formalises an approach that we have seen from many creditors since the onset of the pandemic. Since it started, the majority of creditors have recognised that engagement rather than immediate enforcement can lead to better outcomes for everyone. “