Insolvency legislation update

Insolvency Legislation Update

Following an initial raft of new laws and unprecedented support for businesses hit by the global pandemic covered in our corporate insolvency law update in July 2020 the Government has been busy extending the existing 'temporary' provisions and introducing new insolvency laws at pace. Some of these extend the support already given to businesses but others are designed to tackle tax abuse and raise funds for public services ... and a couple could be game changers.

Starting with the temporary provisions and ending with the potential game changers we summarise and comment on the main changes that affect SMEs.

Statutory demands
The restrictions on statutory demands and winding up petitions originally intended to last until 30 September 2020 have been extended until 31 March 2021. These ably assisted by a new insolvency practice direction have and will all but put a stop to new company winding up orders for over a year when companies have accumulated more debt than ever. The pendulum has never swung as far in favour of debtors before and it will be interesting to see how creditors will react when the restrictions are withdrawn and normal service resumes as it eventually must.

Commercial property rent arrears
Similarly the restrictions on commercial property forfeiture and commercial rent arrears will remain on hold until 31 March 2021. With just 13% of the latest retail rent bills paid many landlords are poised to press for payment when they can and are in a stronger position than most other creditors.

Wrongful trading
Suspension of wrongful trading provisions has been extended to 30 April 2021. Whilst eye catching and one less thing for directors to think about this will have little practical effect as wrongful trading actions are extremely rare and all other director duties remain fully in force.

Preferential creditor status
HMRC's preferential creditor status returns after a 17 year break. Effectively for all insolvency appointments after 1 December 2020 all taxes held by businesses which has been paid by employees (PAYE/employees NIC/CIS/student loan repayments) and customers (VAT) will be a secondary preferential creditor paid after the current preferential arrears of wages and holiday pay preferential creditors. This is the first of our game changers. HMRC for PAYE/NIC/VAT is often the most significant creditor in SME insolvencies so the payment of dividends in insolvencies to ordinary unsecured creditors is going to largely become a thing of the past. Also banks will recover less under their floating charges and we are likely to see more calls under personal guarantees.

Joint Liability Notices
Effectively from 22 July 2020 directors can be made personally liable for repeated company insolvency and non payment of tax in a five year period if they had ...

  • At least two old companies with a similar trade which became insolvent.
  • The old companies had tax liabilities and at least one owed HMRC more than £10,000 and represents over 50% of that company's liabilities to unsecured creditors.
  • A new company carrying on the same or a similar trade

... HMRC can issue a Joint Liability Notice ("JLN") making the director jointly liable with the old companies for tax liabilities at the date of the JLN and jointly liable with the new company for any tax it owes at the date of the JLN and any tax liability arising in the following five years. This is our second game changer and vastly increases the personal risk to directors from multiple company insolvencies. The only unknown is how often HMRC will use this power as it has other similar powers which we rarely see used.

... and that's not all. Still to come before June 2021 is legislation to introduce the mandatory scrutiny of pre-packs which in the Government's eyes has been the bad boy of insolvency since it emerged as a common insolvency process in the early 2000s.

A raft of professional regulations tightened up pre-packs in 2015 but the Government now wants to go further. So any pre-pack sale of a business and assets in administration will either require the consent of creditors (which is unlikely given that pre-packs do not lend themselves to consulting with creditors in advance and relying on retrospective creditor consent would create too much uncertainty) or an opinion from an independent evaluator. For SMEs this could be the final straw making administrations too cumbersome and costly leaving liquidation, which also avoids TUPE, as the best alternative.

Here at McTear Williams & Wood we are ready to help you and your clients navigate any business rescue issues thrown up by the pandemic.  Contact us for more information and advice.