How to avoid company insolvency in 2022

The shackles preventing stakeholders from putting pressure on companies will soon be firmly off as winding up petition protections and rental support end, warn Matthew Padian and Lucy Trott.

Those of us who dabble in the insolvency world keep a keen lookout for the Insolvency Service’s insolvency statistics whenever they appear. 

Recent statistics published in January contained few surprises: comparing 2021 with 2020, creditors’ voluntary liquidations (CVLs) were up, whilst all other types of company insolvencies (including company voluntary arrangements (CVAs), administrations and compulsory liquidations) were down.

This represented a familiar trend - ever since the pandemic began, the total number of company insolvencies has lagged behind pre-pandemic levels. However, thanks to a rapid increase in CVLs in the second half of 2021, in Q4 corporate insolvencies tipped above levels last seen in early 2020.

So what is going on? And what can we expect for company survival rates going forwards?

Looking back

The majority of last year’s CVLs were registered in the second half of the year, with Q4 seeing the highest quarterly number of CVLs for some decades. This coincided with the end of the temporary suspension of wrongful trading liability on 30 June 2021, followed by the end of the furlough scheme on 30 September 2021. CVLs are initiated by shareholders of a company voting to wind a company up.

That last year saw such a dramatic uptick in CVL numbers versus other types of insolvency demonstrates that companies were taking their future into their own hands by taking action to enter insolvency.

Many of these were likely SMEs which struggled to emerge profitably from the pandemic and decided to pull down the shutters for good.

Last year’s fall in CVA numbers can also be partly attributed to the pandemic. Back in 2019 many retailers and casual diners launched CVAs to tackle declining high street footfall and high commercial rents.

The incentive to undertake such restructurings somewhat fell away last year given the continuing restrictions on forfeiture and winding-up petitions.

The return of Crown Preference – giving HMRC secondary preferential status as an unsecured creditor – also dampened potential enthusiasm for CVAs as it leaves fewer choices for presenting a viable arrangement to other unsecured creditors.

Last year also saw fewer businesses being rescued via administration - the lowest annual number since 2003. Perhaps inevitably, given the withdrawal of many support measures, this process aimed at ‘business rescue’ was not on the agenda for many companies, with many choosing a terminal insolvency process (like liquidation) instead or perhaps continuing to limp along for now.  

Looking forward

Turning to what lies ahead for 2022, the widely held expectation is that company insolvencies of all types will increase. This is certainly true when one compares the quarterly insolvency statistics from Q4 2021 against Q3 2021.

This view is based on the premise that the shackles which have prevented stakeholders from putting pressure on companies will soon be firmly off. In particular, the partial restrictions on creditors issuing winding up petitions against companies for unpaid debts continue until 31 March 2022. Until then, the debt threshold for a winding up petition remains at £10,000 or more, and creditors must seek proposals for payment from a debtor business, giving them 21 days for a response, before proceeding with a winding up action.

Landlords remain particularly hamstrung as commercial rents are excluded debts under the current regime, meaning they are unable to issue winding up petitions against tenants for unpaid rents. Moreover, the restrictions on forfeiture for non-payment of rents and the use of the commercial rent arrears recovery process continue until 25 March 2022. The thinking therefore goes that once we’re past March, it will be fair game for creditors.

Businesses also face other challenges, including rising interest rates, inflation and import costs. One cannot predict with certainty what this means for insolvency rates (many insolvency practitioners anticipated a much busier pandemic than proved to be the case). That said, many creditors had their patience firmly tested during the pandemic and may now be in a less forgiving mood.

Managing solvency issues

How can businesses manage their creditors if they start circling with greater agitation?

Firstly, burying one’s head in the sand and hoping for divine intervention seems increasingly unrealistic, especially since the government seems to have lost its appetite for helping struggling businesses. This was evident from the recent energy crisis, with only Bulb Energy attracting any kind of government support.

Secondly, the easy way out - dissolving a company by voluntary strike off and starting a new business from scratch - is no longer quite as straightforward.

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

Each company’s situation is different, but companies should be mindful of their significant creditors – particularly banks, landlords and HMRC. These are often the ones with most to lose from a company’s downfall, so it makes sense to deal carefully with each – perhaps rather than engaging in a drawn-out, complicated and expensive general restructuring with creditors as a whole.

Possible options may include the following:

• discuss potential amendments and extensions to bank loans, perhaps by extending debt maturities or amending the repayment profile of loans.
• seek to agree a rent concession agreement with landlords or, failing that, seek a referral under the rent arbitration scheme under the Commercial Rent (Coronavirus) Bill (which is expected to become law 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 premise closure between 21 March 2020 and 18 July 2021. Any such referrals will need to be made within six months of the bill becoming law. During the arbitration period, landlords will be prevented from forfeiting relevant leases or bringing a debt claim to recover the protected debt. Note that the arbitration process cannot be used by tenants subject to a CVA, scheme of arrangement or restructuring plan, and is likely to assist where tenants have remained unable to keep up their rent payments post-pandemic or which would be unviable even with the arbitrator’s intervention. 
• engage with HMRC around a time to pay arrangement. HMRC is most likely to take action against unresponsive debtors who fail to engage and seek early help.

For companies on the precipice, all possible restructuring options should be explored before calling it quits. These include two recently introduced insolvency procedures - the standalone moratorium and the restructuring plan. It sounds counterintuitive when looking to shore up company finances, but engaging professional advisers early may help to avoid the worst case scenario.

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