Paul Reeves and Joanne Wright, managing directors, restructuring advisory, Kroll

The Insolvency Service has announced that temporary restrictions on creditor action, introduced in the Corporate Insolvency and Governance Act 2020, are to be phased out.

These restrictions were put in place to prevent businesses that were suffering financial distress as a result of the Covid-19 pandemic from being forced into insolvency.

The insolvency emergency room will soon feel the pressure, and directors should take preventative advice

Effectively, this means that, since 1 October 2021, a business’s creditors have been able to serve statutory demands and present winding-up petitions, albeit with a minimum debt level of £10,000 being required during a phased period ending in spring next year. (During this time, landlords will still be unable to petition for winding up in relation to outstanding rent and similar debts.)

What next?

As we emerge from over 18 months of insolvency restrictions and creditor forbearance, which have resulted in near-record lows of corporate failures, what will be the effect on UK businesses now that the protective safety net has been taken away?

We expect to see three distinct scenarios moving forward:

  • There will be the zombie companies that have been artificially propped up and likely to offer little resistance to the winding-up action coming their way. This, however, will not be the end of the story, as the spotlight will then focus on the activities of their directors during this period, particularly in relation to the use of any government assistance.
  • There will be those businesses that are inherently viable but the level of debt means that survival in their current form is unlikely. Potential solutions in this scenario may include a company voluntary arrangement or pre-pack administration. Both of these insolvency processes have their advantages and drawbacks but can ultimately ensure a business’s survival.
  • There will be businesses that have a significant debt burden but will be able to be nursed back to health without the need for an insolvency process. There may be the potential to ring-fence certain key liabilities such as HMRC debt via a formal Time To Pay proposal, in addition to considering any debt refinancing or possible capital raise.

In summary, the insolvency emergency room will soon begin to feel the pressure and directors should be taking early preventative advice, having the status of their company assessed and seeking appropriate remedial treatment.