The new tapered insolvency measures

From 1 October, blanket restrictions on winding-up petitions introduced near the start of the pandemic to protect all businesses from insolvency will be replaced with new tapering measures. The aim is to help businesses get back to normal without yet having to face the full force of reinstated creditor remedies.

However, the new tapering measures are targeted: the continuing restrictions preventing commercial landlords from issuing winding-up petitions for coronavirus rent arrears mean that commercial landlords will notice little change. Their petitioning hands remain firmly tied. For petitioning creditors other than commercial landlords, the tapering measures will not slow them down very much at all, except perhaps at the lower end of the SME space, where the new restrictions on petitions relating to unpaid debts of below £10,000 are most likely to apply. See the box below for further details of the new tapering measures.

These insolvency tapering measures will stay in place until 31 March 2022, by which time it is understood that the government's proposed binding arbitration scheme should be available to deal with any remaining Covid-rent arrears, and all remaining temporary measures will be lifted.

Since the blanket insolvency restrictions were introduced early in the pandemic, the effect on the level of corporate insolvencies has been dramatic. 2020 saw the lowest level of corporate insolvencies since 1989, notwithstanding the steepest drop in GDP since consistent records began in 1948. The policy aim to protect viable businesses that were heavily impacted by Covid and needed more time to recover was prioritised over the normal functioning of the insolvency regime. As well as protecting many viable, but Covid-affected, businesses, this blunt approach to prevention of insolvencies has left the economy burdened with an increased number of unviable businesses operating at the expense of their creditors. With the country emerging from the pandemic and other government support schemes being phased out, it's appropriate that the insolvency regime is now allowed to do its job again.

With every extension of the temporary measures, concerns have grown about the theoretical 'tsunami' of insolvencies that could overwhelm the courts if the insolvency restrictions were allowed to lapse in their entirety overnight. The government has attempted to mitigate against this with their tapered approach to the removal of the restrictions, but for non-landlord creditors owed over £10,000, it will pretty much be back to business as usual. Could this lead to a large increase in insolvency numbers?

The Insolvency Service's monthly statistics for August 2021 show corporate insolvencies back at pre-pandemic levels for the first time since the beginning of the pandemic (driven by an increase in creditors voluntary liquidations), and with winding-up petitions being switched back on, we can expect numbers to increase as the year goes on.

Whether we'll see the flood of insolvencies that many have been predicting for some time is less certain. The severe economic shock that we saw during the first lockdown has been followed by strong recoveries in summer 2020 and spring 2021¹ . According to the ONS's latest business insights statistics², 90% of businesses are currently trading, with 53% reporting no effect to turnover compared with normal expectations for this time of year. Many businesses have taken advantage of the numerous government support schemes to help with liquidity, although with furlough coming to an end on 30 September and repayments under the BBLS and CBILS starting to fall due, pressure on cashflow will tighten. Economic headwinds such as rising inflation, the surge in gas prices, supply chain disruptions and the shortage of HGV drivers and other labour mean that the economic outlook remains very uncertain, and that's without the spectre of future potential social restrictions if the country experiences an unmanageable surge this winter. There can be little consensus of opinion surrounding the scale or quantum of predicted future insolvencies, either within particular sectors or across the economy at large. As ever, it seems practitioners must continue to expect the unexpected.

_{1. House of Commons Research Briefing – Coronavirus: Economic Impact (published 24 September 2021) https://commonslibrary.parliament.uk/research-briefings/cbp-8866/}

_{2. Office for National Statistics Business insights and impact on the UK economy: 23 September 2021 https://www.ons.gov.uk/businessindustryandtrade/business/businessservices/bulletins/businessinsightsandimpactontheukeconomy/latest#industry-insights}