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Insolvency Round-up

Phil Farrelly

The latest Insolvency statistics

The latest insolvency stats have just been released by the Insolvency Service and it comes as no surprise to see the figures for the past  nine months have been historically low- about 40% lower than normal-  as companies continue to benefit from the Government support measures and the temporary restrictions on the ability to issue statutory demands and winding up petitions.

The rise in corporate (but not personal) insolvencies in the month of December 2020 did come as a bit of a surprise. There were a total of 1,228 registered company insolvencies, which comprised of:

  • 998 creditors’ voluntary liquidations (CVLs),
  • 35 compulsory liquidations,
  • 150 administrations and
  • 45 company voluntary arrangements (CVAs).

When compared with the number of company insolvencies registered in December 2019:

  • CVLs were 26% higher,
  • compulsory liquidations were 80% lower,
  • administrations were 7% higher, and
  • there were twice as many CVAs, though numbers were small.

December 2020 was the first month in which overall company insolvency registrations have been higher than the comparable month in 2019 since the start of the first UK lockdown. It is too soon to tell whether this represents an emerging trend and it should be noted that the numbers of company insolvencies registered in December 2019 were themselves low compared to all other months in the year.

Moratoriums and Restructuring Plans

In our Summer 2020 newsletter we told you all about the new Insolvency relief provisions that had been created by The Corporate Recovery & Insolvency Act 2020.  Between the 26 June (the date the new law came into force) and 30 November 2020, just four companies had obtained a moratorium and just two companies (Virgin Atlantic and Pizza Express)  had a new restructuring plan sanctioned by the court.

The low number of cases of each of these new legislative tools since the Act came into force is likely to be as a result of the range of Government support provided to companies as mentioned above, including the range of temporary measures that have recently been extended for a further period.

Temporary Restrictions & Support

The temporary restrictions that prohibit winding up proceedings, and statutory demands where non-payment is COVID-19 related have been extended until 31 March 2021 as has the prohibition on landlords forfeiting or exercising CRAR (Commercial Rent Arrears Recovery).

The suspension of wrongful trading liability has also been revived with effect from 26 November 2020 to 30 April 2021.

The Furlough scheme is extended until 30 April 2021 and Government backed loan schemes extended to 31 March 2021.

As we mentioned earlier, the extension of these prohibitions is likely to keep the insolvency figures relatively flat for the first quarter of 2021.

The Return of Crown Preference

On 1st December 2020 the provision in the 2002 Enterprise Act which abolished what was known as Crown Preference in the UK was swept aside with new legislation reintroducing the concept of Crown Preference again.

Now certain debts to HMRC are moved up the hierarchy in an insolvency process to rank as secondary preferential debts which rank after secured creditors and employees’ preferential claims but before claims of floating charge holders and unsecured creditors.

The types of tax that are covered are those that are collected by companies on HMRC’s behalf and include VAT, PAYE, employee national insurance contributions, student loan repayments and construction industry scheme deductions. Other tax debts that the company owes on its own account such as corporation tax will still rank as ordinary unsecured claims.

This could have a dramatic impact on lenders, especially when you bear in mind that many companies have taken advantage of the Covid 19 provisions that have allowed them to defer some tax payments so many of them will have accrued significant arrears owed to HMRC.

Will this change spell the end for company voluntary arrangements (CVAs)?

They will certainly become difficult to achieve because you can’t compromise preferential claims unless the preferential creditor agrees. With HMRC as a preferential creditor, it will not be possible to compromise their claim without their consent (which is unlikely to be given).

Lenders need to think carefully about how they can best protect themselves. Careful due diligence to make sure the borrower is complying with its tax obligations, regular checks to ensure that this remains  the case and perhaps restructuring finance models are all worth considering.

Contact:

Phil Farrelly

t: 0161 827 4609

e: philip.farrelly@bermans.co.uk

w: Web Profile

 

 

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