How to avoid business insolvency in 2022

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Shackles preventing stakeholders from lobbying companies will soon be resolved as petition protections and rental aids end, warn Matthew Padian and Lucy Trott.

Those of us who dabble in the insolvency world carefully monitor the Insolvency Service’s insolvency statistics whenever they appear.

Recent statistics released in January contained few surprises: comparing 2021 to 2020, voluntary creditor liquidations (CVLs) were on the rise, while all other types of corporate defaults (including corporate voluntary agreements ( CVA), administrations and court-ordered liquidations) were down.

It represented a familiar trend – since the start of the pandemic, the total number of business insolvencies has lagged behind pre-pandemic levels. However, thanks to a rapid increase in CVLs in the second half of 2021, in the fourth quarter corporate bankruptcies exceeded levels last seen in early 2020.

So what’s up? And what can we expect for business survival rates in the future?

Looking back

The majority of last year’s CVLs were recorded in the second half of the year, with the fourth quarter seeing the highest quarterly CVL count in several decades. This coincided with the end of the temporary suspension of commercial liability at fault on June 30, 2021, followed by the end of the furlough scheme on September 30, 2021. CVLs are initiated by shareholders of a company voting for the liquidation of a society.

The fact that the past year has seen such a dramatic increase in the number of CVLs compared to other types of insolvency demonstrates that companies were taking their future into their own hands by taking steps to enter insolvency.

Many of them were probably SMEs that struggled to emerge from the pandemic profitably and decided to close the doors permanently.

The fall in CVA numbers last year can also be partly attributed to the pandemic. In 2019, many retailers and casual restaurants launched CVAs to combat declining high street footfall and high commercial rents.

The incentive to undertake such restructurings has waned somewhat over the past year given continued restrictions on forfeiture and liquidation petitions.

The return of Crown preference – giving HMRC secondary preferential status as an unsecured creditor – has also dampened potential enthusiasm for CVAs as it leaves less choice to present a viable arrangement to other unsecured creditors. guaranteed.

The past year has also seen fewer businesses rescued via government – the lowest annual number since 2003. Perhaps inevitably, given the withdrawal of many support measures, this process of “business rescue” n Wasn’t on the agenda for many companies, with many choosing a terminal insolvency process (like liquidation) instead or perhaps continuing to limp for the time being.

Looking forward to

As for what lies ahead for 2022, the widely held expectation is that business bankruptcies of all types will increase. This is certainly true when comparing quarterly insolvency statistics from Q4 2021 to Q3 2021.

This point of view is based on the premise that the obstacles that have prevented stakeholders from putting pressure on companies will soon be definitively removed. In particular, the partial restrictions on creditors making liquidation petitions against companies for unpaid debts continue until March 31, 2022. Until then, the debt threshold for a liquidation petition remains at £10,000 or more, and creditors must request payment proposals from a debtor company, giving them 21 days to respond, before proceeding with liquidation action.

Landlords remain particularly crippled because commercial rents are excluded debts under the current regime, meaning they are unable to issue liquidation petitions against tenants for unpaid rent. Additionally, the restrictions on forfeiture for non-payment of rent and use of the commercial rent arrears collection process continue until March 25, 2022. It is therefore believed that once March has passed, it will be fair game for the creditors.

Businesses also face other challenges, including rising interest rates, inflation and import costs. What this means for insolvency rates cannot be predicted with certainty (many insolvency practitioners were anticipating a much more active pandemic than has proven to be the case). That said, many creditors have tested their patience during the pandemic and may now be in a less forgiving mood.

Management of solvency problems

How can companies deal with their creditors if they start running in circles with greater turmoil?

First, lying in the sand and hoping for divine intervention seems increasingly unrealistic, especially as the government seems to have lost its appetite for helping struggling businesses. This is evident from the recent energy crisis, with only Bulb Energy attracting any form of government support.

Second, the easy way out – dissolving a company by voluntary delisting and starting a new company from scratch – is no longer so simple.

The new Rating (Coronavirus) and Disqualification of Directors (Dissolved Companies) Act 2021 empowers the Insolvency Service to investigate the conduct of rogue directors of dissolved companies, even after the company has closed.

Every business’ situation is different, but businesses should be aware of their significant creditors, especially banks, landlords and HMRC. They are often the ones with the most to lose from a company’s downfall, so it makes sense to treat each one with care – perhaps rather than embarking on a long, complicated and costly general restructuring with the whole creditors.

Possible options may include the following:

  • discuss potential modifications and extensions of bank loans, perhaps extending debt maturities or changing loan repayment profile.
  • seek to enter into a rent concession agreement with landlords or, alternatively, seek a referral under the Rent Arbitration Scheme under the Commercial Rents Bill (Coronavirus) (expected to come into force at the end of March 2022). This allows tenants to refer to arbitration a decision on unpaid commercial rent relating to any mandatory period of business or premises closure between March 21, 2020 and July 18, 2021. Such referrals must be made within six months following the entry into force of the bill. During the arbitration period, landlords will be prevented from relinquishing the affected leases or taking legal action to recover the protected debt. Note that the arbitration process cannot be used by tenants subject to a CVA, plan of arrangement or plan of restructuring, and is likely to help tenants who have remained unable to maintain their rent after the pandemic or that would not be viable even with the arbitrator. intervention.
  • engage with HMRC around a time arrangement to pay. HMRC is most likely to take action against unresponsive debtors who fail to commit and ask for prompt help.

For companies on the edge of the precipice, all possible restructuring options should be explored before stopping. These include two recently introduced insolvency proceedings – the Autonomous Moratorium and the Restructuring Plan. It seems counter-intuitive when looking to shore up business finances, but engaging professional advisors early can help avoid the worst-case scenario.

This article was first published in Daily accounting and can be read online here

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