Businesses warned to act quickly as insolvency support comes to an end
Businesses have been warned to act quickly if they are at risk of creditor actions as temporary measures brought in to support firms from insolvency during the pandemic will be phased out from 1 October.
Since June last year, The Corporate Insolvency and Governance Act 2020 has given protection from creditor actions to companies in financial distress as a result of Covid.
This was to ensure that viable businesses affected by the restrictions on trading during the lockdown periods were not forced into insolvency unnecessarily. However, the government is lifting the restrictions on creditor actions as the economy returns to normal trading conditions.
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Instead, the government will introduce new legislation, which will be in force until 31 March next year, to give smaller businesses more time to trade back to financial health before creditors can take action to wind them up.
The new legislation will raise the current debt threshold for a winding up petition to £10,000 or more and will require creditors to seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with any winding up action.
Todd Davison, managing director of Purbeck Personal Guarantee Insurance, said that the changes reflect improving economic conditions but warned that companies must act quickly to be best placed if at risk of creditor actions.
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“Insolvency restrictions couldn’t last forever and a tapered move back to normal insolvency restrictions was going to happen,” said Davison.
“The end of the temporary measures reflects the hope that the economy is on course to normal trading conditions. However, businesses must act quickly to be best placed if they face or are at risk of creditor actions.
“It has helped to stave off insolvency proceedings for many businesses – as demonstrated by tracking the insolvency statistics. That said, it will soon become clear whether these measures have protected otherwise healthy businesses or propped up zombie businesses reliant on government support and restrictions on action under insolvency legislation.
“It represents a stepping stone back to normal insolvency rules by allowing creditor action but giving businesses 21 days (rather than seven days) to respond.
“For late payment issues, the ending of the restrictions should help pave the way for creditors to recover monies due more quickly and also increase propensity for funds to flow throughout supply chains with businesses unable to rely on the protection from insolvency.”
Frank Wessely, partner at insolvency advisory firm Quantuma, said the temporary legislation led to a huge drop in insolvencies but predicted the number will now rise gradually.
“The act has made a difference to the number of insolvencies published by the government,” he said.
“It’s been evidenced their objectives in terms of reducing the financial impact of the pandemic in numbers of insolvencies.
“They have succeeded to a degree because the numbers are significantly lower. The numbers have been increasing as support or restrictions have eased or the timelines of their easing approaches.
“We’ve seen a small uptick and I suspect that will continue and we’ll see a gradual increase in the number of insolvencies as things go on.”