Insight & Analysis

Insolvency industry braced for application avalanche

Published: Apr 2021

The UK’s new insolvency regime is expected to receive the sternest of tests over the next 12 months as companies kept afloat by state coronavirus supports face the harsh reality of changes to customer demand and operating conditions.

Avalanche falling from a mountain

Politics and hyperbole often go hand-in-hand, but in the case of the Corporate Insolvency and Governance Act (CIGA) which came into force on 25th June 2020 at least some of the hype can be justified.

Aside from the temporary measures introduced in response to the pandemic, one of its key provisions is the introduction of the corporate moratorium, an extendable 20 working day period giving businesses protection from creditor action while they seek professional restructuring advice. This also prevents legal action being taken against a company without permission from the court.

In addition, CIGA extends the suspension of termination clauses when a company enters into an insolvency procedure and introduces a new restructuring plan that has the ability to bind creditors to it.

Ed Macnamara, Head of Restructuring Refinancing and Insolvency at PwC, says the changes introduced in the act provide companies with more options and so, arguably, a better chance of survival.

“The moratorium gives businesses breathing space from creditor action and allows time to prepare and pursue a turnaround plan,” he says. “The restructuring plan seeks to prevent minority dissenting creditors from a ‘hold-out’ position and is focused on trying to get businesses to achieve a fair compromise with their financial stakeholders.”

According to Blair Nimmo, Head of Restructuring at KPMG, there are aspects of CIGA that will give companies a better chance of surviving insolvency. He also refers to the act as moving the dial towards a more debtor-friendly insolvency regime in the UK.

“The main focus is on rescuing the business and maintaining employment,” he adds. “However, I don’t recall a single instance (prior to the introduction of CIGA) where a potentially viable company could not be rescued because the appropriate insolvency procedures were not available.”

The Insolvency Service reports that the number of registered company insolvencies in February (686) was 49% lower than in the same month in 2020, continuing a trend that started with the first UK lockdown in March 2020.

Between 26th June 2020 and 28th February 2021, just four companies obtained a moratorium and only five had a restructuring plan sanctioned by the court – figures the Insolvency Service acknowledges are likely to be as a result of the range of government support provided to companies affected by the pandemic.

Nimmo says a surge in the number of companies applying for insolvency is likely to happen at some point this year, depending on when and how quickly the coronavirus crisis supports are withdrawn.

Macnamara agrees, adding that the expectation is that insolvencies will rise but probably not until the back end of 2021 or even early 2022.

“As support unwinds, loans need repaying and activity levels start to rebound, many businesses will need new funding and working capital facilities,” he explains. “Some will have seen structural shifts in their operating model (changes in customer habits, new ways of working) which could fundamentally undermine their viability, while others will be unable to attract finance to support their needs as the business ramps back up.”

As for what this might mean in terms of specific numbers, annual insolvencies were running at around 25,000 during the last UK recession and between 17,000 and 18,000 during the benign environment between the end of the recession and the start of the coronavirus pandemic. Some informed predictions suggest they will peak later next year and into 2023, at around 32,000.

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