There’s an interesting article in the ICAEW’s magazine Economia this month, quoting Paul Bannister, Head of Policy at the Insolvency Service. He makes the case that the emergency measures the government introduced to cope with the pandemic were of two types, temporary and permanent, writes Stephen Wade, a Partner specialising in insolvency and debt recovery in our Dispute Resolution Department.
“The sudden beginning of the pandemic and the imposition of the first lockdown brought about an economic scenario we’ve never seen before,” Bannister says. “It was obvious very quickly that the government had to bring in some extraordinary measures that it had never done before.
“It would normally take an Act of Parliament of the scale that was introduced, about a year and a half ago, to both develop and get through the parliamentary process we were given 12 weeks.”
The Act in question was the Corporate Insolvency & Governance Act 2020.
The permanent measures
“The idea was that the (company) moratorium would give companies 20 days of breathing space from their creditors, whilst they could attempt to try and find a rescue out of their immediate financial problems,” said Bannister.
“The restructuring plan, which was the second part of the restructuring package, was a flexible tool to allow companies to restructure their debts.”
Cross Class Cram Down (CCCD), was one of the new measures ensuring that even dissenting classes of creditors be crammed down on their debt, even if they disagreed – often a major issue in restructuring. Before this Act, Economia explains, many rescue procedures couldn’t get through because of it.
The temporary measures
The two principal temporary measures were the relaxation of wrongful trading and the restriction of winding-up companies. Bannister said wrongful trading is a deterrent measure that is there to protect creditors from directors who will continue to trade even if their company is clearly insolvent.
“However, this proved to be an immediate problem at the onset of the first lockdown because it became clear many companies could be technically insolvent because they were unable to trade. And we were concerned that they would have to put their business into insolvency despite being essentially viable, but just in these very unusual circumstances, so we had to act quickly on this.”
Commercial landlords in particular were using winding up petitions due to non collection of rent as a way of forcing their tenants to pay. Restricting landlords from doing this was the government’s way of ensuring that many businesses continued to trade their way through the pandemic.
The extension of wrongful trading provisions have been renewed three times, but are due to expire at the end of June. Rishi Sunak, the Chancellor of the Exchequer, has indicated in recent days that a fourth extension is not being considered, although this is perhaps contingent on the current lockdown restrictions being lifted later in July.
It’s fair to say, the picture’s fluid.
Have these temporary measures all done their job?
Certainly, the number of company closures is down compared to the similar period in 2019, so in that regard the Act has prevented a big rise in insolvencies, protecting many thousands of businesses, jobs and vital investment. However, when the furlough scheme ends in September and protection from commercial landlords against eviction is lifted it would be naïve to argue that insolvencies are not going to rise above trend, in my opinion.
As Paul Bannister concludes, “The key is what happens once all these measures finally expire, and it’s time for the economy to stand on its own again.”
You can read the whole of his interview here.
The above is accurate as at 21st June 2021. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.