Insolvency in Scotland and the UK – 2021 and what lies ahead

The most recent UK and Scotland-specific statistics seem to show that the low comparative levels of corporate insolvency that we have seen as a result of the COVID-19 temporary measures may be coming to an end.

The Accountant in Bankruptcy (AiB), the Scottish equivalent of the Insolvency Service, reports that the number of Scottish companies becoming insolvent or entering receivership increased by over 80% in the second quarter of 2021-22, with 211 companies becoming insolvent compared with 117 in the same quarter of 2020-21.

Historically, most insolvencies in Scotland have been driven by compulsory liquidation, however, the recent uptick has been due to creditors' voluntary liquidations (CVLs). Compulsory or court ordered liquidations, together with administrations, remain low, no doubt due to the temporary measures.

Innovations in corporate restructuring

There is no doubt that certain sectors have coped well during the last 12 months, but for retail, hospitality and leisure, it has been tough. The protections brought in by the UK Government via the Corporate Insolvency and Governance Act 2020 and by the Scottish Government via the Coronavirus (Scotland) Acts (No 1 & 2 and associated regulations) over the past 12 - 18 months have played a significant role in cushioning the impact of COVID-19 on both businesses and individuals. For individuals, we have seen protections in the form of increased limits for sequestration (currently £10k), as well as the extension of personal moratoriums from six weeks to six months.

The pandemic has also seen innovation by government in developing the law of corporate restructuring, with the introduction of restructuring plans and the corporate moratorium. In addition, we have seen tactical deployment of measures such as the prohibition on winding up orders, which has provided some businesses with a vital shield from creditors.

CVAs – a mixed response to their use

Despite the overall downturn in insolvencies, for those businesses that have sought insolvency and restructuring support, Company Voluntary Arrangements (CVAs) have increased in popularity over the past 12-18 months. In particular, they became the restructuring tool of choice for the retail and the casual dining sectors, where businesses appreciated the flexibilities afforded by a CVA to attempt to reach agreement on debts and repayment with creditors.

More recently though, there were no CVAs (or receivership appointments) recorded in Scotland during Q2, and the UK-wide position also shows a substantial reduction in volume.

The response to use of CVAs has been mixed; there are those who believe their increased use is indicative of a resilient business community that wants to ensure survival, and there are also those who believe their popularity is indicative of opportunism among tenants, who use them to re-write existing tenancy agreements to their advantage. Irrespective of opinion though, the increased use of CVAs has given rise to high levels of disputes – creditors have raised numerous challenges on the grounds of unfair prejudice and/or material irregularity.

End of temporary measures and challenges ahead

While the temporary measures brought in by government have been a lifeline for many businesses until normal operations could resume, there are others who now face a challenging period ahead. On 30 September 2021, the temporary suspensions on winding up orders were lifted, although some conditions remain and must be satisfied before petitions can be lodged to wind up a business.

On 31 March 2022, the last of the temporary measures that prevent landlords from winding up a business for arrears will be lifted. It will be interesting to see the impact of this on tenants in the commercial property market. We also expect to see an increase in creditor-led insolvencies when the petitioning debt level of £10,000 is removed.

We understand HMRC and the Insolvency Service are now turning their attention to bounce back loan lending. Their ability to take action is being expanded by the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, which will allow the Insolvency Service to investigate directors of dissolved companies with unpaid debts to creditors. Previously, this was only possible where a company was placed in a formal insolvency process.

During the pandemic many businesses have built up large amounts of debt. As government reliefs are lifted or tapered, the ability to trade is tested and the fault lines can show. For example, the lifting of furlough adds to the amount to be paid in wages which, for a long time, have been subsidised. Bounce back loan repayments too, will need to be repaid. This is all occurring at a time when businesses are finding their operating costs are increasing (for example, rising fuel and electricity costs) and when they may not yet be trading at pre-pandemic levels. While the temporary measures are in place, businesses have breathing space to try to find ways to repay their debts, for example through new sources of financing, or by agreeing extended repayment terms with creditors.

Act now, not later

For those that face financial challenges, acting quickly is key. That includes speaking to creditors to try to reach an agreement prior to the lifting of a number of COVID-19 related protections next year, and seeking professional advice at the earliest opportunity. There may still be options available even if matters are quite advanced, so don't assume all is lost.

Directors should be alive to the fact that they have a legal responsibility to behave in accordance with their directors' duties at all times; this is most acute if their company is facing insolvency. Penalties for those who are found in breach of those duties are severe, and where instances of trading while insolvent, breach of duty or indeed fraud are discovered, we expect those to be investigated and pursued in the coming months.

Overall, however, we expect the trend for all forms of insolvency to move upwards, with a likely associated increase in action against directors. As always with such matters, the key is to seek advice as early as possible.