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The future of insolvency in the UK

Asa Buchanan
02/05/2022

Locations

Spain, United Kingdom

A panel of industry experts shared their views at a Fieldfisher seminar on what lies ahead for businesses and the practice of insolvency in a changing economic and regulatory environment.
 
In April 2022, Fieldfisher's international insolvency group and industry association R3 assembled a multi-disciplinary panel of leading experts to discuss the future of insolvency at a time of changing legislation and government policy.

The all-female panel, chaired by Fieldfisher restructuring and insolvency director Carly Schiff, covered a range of issues that are expected to have significant implications for the execution of insolvencies in the UK and the wider insolvency profession.

The panellists were:

  • Caroline Sumner, CEO, R3 Association of Business Recovery Professionals

  • Catherine Burton, Judge, Insolvency and Companies Court (ICC)

  • FJ Gregor, Partner, Beechbrook Capital

  • Annabel Norris, Associate Debt Director, Ellandi

The discussion was also attended by Fieldfisher restructuring and insolvency partner Cristina Asencio and corporate partner Rodrigo Martos from the Madrid office of Fieldfisher Spain.

Topics discussed included:

  • The economic outlook for companies

The effects of the Covid-19 pandemic and successive lockdowns put a number of SME businesses under strain and curtailed investment for the best part of two years.

At the same time, businesses were encouraged to take on debt in the form of government loans to help them pay bills and survive the impact of lockdowns on trading.
 
Economies and demand for products and services bounced back quickly with the easing of restrictions, creating opportunities for some businesses to profit from the disruption.

However, cost/wage inflation, energy prices, staff shortages and the lingering effects of Brexit have restricted many SMEs from recovering to the extent they hoped and have placed some in financially precarious positions.  

  • Changes in the commercial real estate sector 

Commercial rent arrears arbitration scheme

As of 24 March 2022, commercial landlords in the England and Wales and their tenants now have the option to use the new statutory arbitration process for commercial rent arrears that accrued during the forced closure of businesses due to the Covid-19 pandemic (established by the Commercial Rent (Coronavirus) Act 2022.
 
The scheme is open to eligible commercial landlords and tenants who have not already reached an agreement to resolve outstanding commercial rent debts related to the pandemic, and to businesses including pubs, gyms and restaurants that racked up commercial debts when they were mandated to close, in full or in part, from March 2020 until the date restrictions ended. Debts accrued at other times are not in scope.
 
The level of take-up of this scheme is yet to become clear. However, for many, the best course of action for commercial landlords and tenants is to try to negotiate their own agreements to clear outstanding debts using the new Code of Practice, published on 7 April this year.
 
While the option of a statutory process for resolving differences is welcome for the most complicated disputes, private negotiation will avoid the uncertainty, cost and time consequences that result from a referral to arbitration.
 
The legislation itself makes clear that arbitration should be a last resort. The effectiveness of the scheme will rely on consistent decisions and awards handed down by the arbitrators across England and Wales.
 
Flexible working
 
The shift from five-day weeks in the office to more flexible working arrangements as a legacy of lockdowns is also having an impact on the commercial property market.
 
Some tenants have found the cost of leasing their pre-pandemic premises is unsustainable without full occupancy, while landlords are coming under pressure to adapt office space to accommodate flexible working by providing hot-desks, more meeting rooms for hybrid meetings and amenities to encourage tenants to take up the space.

For many landlords, who may have seen their rental income slashed or at least delayed as a result of the pandemic, this means revisiting their financial/revenue models and investing in retrofitting and upgrading, or potentially selling, their properties.

  • The future use of CVAs

Changes to UK insolvency law mean that the Company Voluntary Arrangement (CVA) has, arguably, essentially become redundant.

In the October 2018 budget, it was announced that certain tax debts would be moved to preferential status (known as Crown Preference).
 
This change has been hugely consequential for CVAs. It means that if a company wishes to propose a CVA, its proposal will need to include payment in full of all employee NICs and (because the government allowed VAT payments to be deferred during the pandemic, potentially accumulated) VAT before unsecured creditors receive anything. This in turn makes creditors unlikely to approve CVAs from which they are set to receive little or nothing.
 
UK government figures released in April this year showed the number of CVAs decreased from 94 in the first three months of 2019 to just 25 in the first three months of 2022 – a 73% drop.

That said, there remains scope for CVAs to be used to try to reduce rental liabilities, creating the likelihood of further challenges by landlords to these arrangements.

  • The capacity and capabilities of the court system

The Covid-19 pandemic disrupted the functioning of already overburdened UK courts and has stored up a backlog of additional cases requiring judicial resolution.

While the courts are working to clear the backlog, listing times for hearings stretch far into the future.
 
It remains to be seen how the expansion of the Insolvency and Companies Court Interim Applications Court (ICC) Judges' interim applications list will affect the processing of applications for insolvency proceedings.
 

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