End of COVID Insolvency Protection?

Written by John A Waller, Director June 3rd,2022.

The remaining insolvency restrictions introduced during the COVID-19 pandemic to protect struggling companies have been lifted.

However, since the 2020 outbreak of the Coronavirus COVID-19 pandemic, the UK government has facilitated cash flow support to UK businesses amounting to over £200 billion.

UK insolvency rules have now returned to what they were pre-pandemic. This means creditors have total legal measures to petition for action against businesses that failed to maintain repayments.

So businesses with outstanding debts must understand the changes concerning their insolvency risk. The government recommends that any company experiencing difficulties servicing their debts seek urgent advice from a licensed insolvency practitioner.

Many options exist to protect your viable limited company, and importantly creditors, such as:

However, if your company is no longer viable, then your options are:-

The temporary protections introduced in The Corporate Insolvency and Governance Act 2020. included:

  • The suspension of statutory demands;
  • A block on the enforcement of personal liability against directors for wrongful trading and
  • Restrictions on creditors serving winding-up petitions against limited companies.
Wrongful Trading

Gradual changes made since the middle of 2021 & End of COVID Insolvency Protection?

Since the middle of 2021, measures assisting companies have steadily been phased out. The first measure removed the suspension of personal liability for wrongful trading. After being removed in September 2020, this measure was reintroduced in November 2020, before finally ending on 30 June 2021.

However, The rules around serving statutory demands and winding up petitions changed in October 2021. Until 30 September 2020, creditors could not serve statutory demands for debt outstanding. Also, creditors could not wind up a company for non-payment. However, if they could prove the debtor’s incapacity to pay was not due to the COVID-19 pandemic or that he would not have been able to pay regardless of the pandemic.

Since October 2021, creditors have been allowed to serve statutory demands. The most noteworthy was that demands could only lead to petitioning for a winding-up order if the debt £10,000 or more. In addition, creditors had to allow debtors to present a formal repayment proposal within 21 days of a statutory demand.

However, revised measures expired on 31 March 2022 and have not been restored. This means creditors no longer required to offer a 21-day window for repayment proposals before petitioning for a winding-up order the courts also returned to the pre-pandemic level of £750.

Higher insolvency risk for SMEs

The concern with lifting the insolvency protection is that companies are in more debt than before the pandemic, and trading conditions remain challenging.

Bank of England figures show the UK’s corporate debt burden has increased by £79bn from 2019 to the first quarter of 2021. While this only represents a 6% increase, SMEs have seen debt levels spike by 25% during the pandemic.

Most of the time, companies facing an increased debt burden have had government loans to help with cash flow and insolvency protections. Directors are concerned, however, about returning to:

  • Low insolvency thresholds, and 
  • Removal of COVID-19 related business support
  • High debt levels cause small businesses to receive winding-up orders.

 

Bounce Back Loan advice for Directors
Directors should seek professional advice if they have Bounce Back Loan worries regarding repayments. The UK government introduced the COVID-19 support scheme to support businesses through the pandemic. However, repaying the loans has been difficult. So ensure you seek advice sooner than later.