U.K. Lifts Most Pandemic Measures That Staved Off Insolvencies
U.K. Lifts Most Pandemic Measures That Staved Off Insolvencies
(Bloomberg) --
The U.K. government is getting rid of most of the measures that helped businesses stay afloat during the darkest days of the pandemic.
Starting Oct. 1, creditors will once again be allowed to serve statutory demands -- a written warning from a creditor to ask for payment of money owed -- and file winding-up petitions for companies that haven’t paid their debts on time. The government reintroduced personal liability rules for directors in July.
The U.K. is unwinding the measures as business activity recovers following a series of lockdowns since early 2020, with workers returning to offices and demand for goods and services buoyant. They were put in place to safeguard companies that saw their revenue plummet, keeping insolvency numbers artificially low.
Here’s a look into what will change from Friday:
Is everything being lifted?
No. There will still be measures in place to safeguard small businesses. Wind-up petitions can only be filed if debts are over 10,000 pounds, and the debtor will have 21 days to come up with a proposal for repayment.
And rules that protect commercial tenants with arrear payments will remain in place until March, unless landlords can prove that the missed payments aren’t related to the pandemic.
“A landlord is likely to have a hard time proving that the company would have been unable to pay the rent anyway – unless the rent was accrued but unpaid prior to the onset of Covid,” said James Watson, a restructuring partner at law firm Simpson Thacher & Bartlett.
Even without restrictions, it’s unlikely that property owners, especially institutional landlords, would be looking to push tenants into liquidation, according to Craig Montgomery, partner at law firm Freshfields Bruckhaus Deringer.
Wrong timing?
The lifting of temporary measures to protect businesses from the impact of the pandemic arrives at a delicate time for the U.K. The country is facing an energy crunch, supply chain bottlenecks, rising inflation, just as the furlough scheme comes to an end. The combination of these elements is likely to push more companies close to insolvency.
Restructuring practitioners expect the number of bankruptcies to remain stable until the end of the year. But a turning point could come after the winter break, when consumers may run out of their Covid savings, according to Freshfields’ partner Richard Tett.
“There are already some signs of customer spending on the high street slowing down, which is not good news for some of those retailers,” he said.
What companies are most exposed to the rule change?
Small and medium-sized companies are the ones more likely to see the rate of insolvencies going up.
“Given the 10,000 pounds threshold, the changes in place from Oct. 1 may well have an impact on smaller companies, but I doubt we will see a flood of winding up petitions,” said Jennifer Marshall, partner at law firm Allen & Overy.
Although overall numbers were still low compared to the years before the start of the pandemic, the number of creditors’ voluntary liquidations surged almost 40% in the three months ending in June compared to the previous quarter, according to data from the U.K. Insolvency Service.
“Those companies tend to be mid-market firms, the sort that probably can’t use the restructuring tools available for larger ones,” said Adam Gallagher, partner at Simpson Thacher & Bartlett.
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The end of the furlough scheme is likely to add another challenge, according to Julie Palmer, regional managing partner at insolvency specialist Begbies Traynor.
“Many who expect their normal business to return with the added burden of support loans and probably deferred VAT and rent deferrals will struggle,” she said.
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