2022 predictions: what’s on the horizon for restructuring and insolvency?
The persisting spectre of the pandemic continues to create uncertainty in the market. Over the last 18 months, insolvency figures remained consistently low due to the government support which has been in place. With the prospect of that support coming to an end there is likely to be a reckoning, but when that will begin is unclear. Overall, this next year is likely to be one of resolving loose ends and tidying up before the economy can take off afresh.
The travel, retail, hospitality and leisure sectors continue to experience difficulties with a general loss of business due to the pandemic. Joining the list of impacted sectors are construction and property development markets, which have seen the largest number of insolvency processes commenced in recent months. For all areas of the economy there is now the real prospect of significant energy price increases (particularly for those industries which have a high energy consumption) and a general increase in all costs through inflation later in the year. As government pandemic support ends and repayments become due on Bounce Back Loan Schemes (BBLS) and Coronavirus Business Interruption Loan Schemes (CBILS), the pressure on all sectors will increase and likely result in a rise in the number of insolvencies.
Company Voluntary Arrangements (CVAs)
In March of this year, the Court of Appeal will hear the appeal in the challenge to the New Look CVA. The case will be important to the continued use of CVAs as a restructuring tool as the landlords challenge its use to cram down specific types of creditor, while leaving other unsecured creditors whole. Mr Justice Zacaroli’s judgment at first instance upheld the use of CVAs in this way. Hopefully the Court of Appeal’s judgment will be released shortly after the hearing, so that uncertainty is kept to a minimum.
The Insolvency Service has also recently invited parties to tender to carry out academic research into the treatment of property owners when compared with other creditors in CVAs. There has been much lobbying of the Insolvency Service by the property sector to prevent, or at least reduce, the use of CVAs solely to reduce property liabilities. Whilst there is unlikely to be any concrete outcome from the research this year, the request for parties to tender is perhaps the beginning of a period of reflection by the government on the policy behind the use of CVAs.
Any curb on the use of CVAs in this way is only likely to result in an increased use of the Restructuring Plan process, which was introduced in the summer of 2020. The process, which requires creditor as well as court approval of the compromises proposed by the company, has been used a handful of times in the 18 months since its introduction. However, due to the costs involved in carrying out two court hearings, it has so far been largely limited to use by larger corporate entities. It is possible that any change to the efficacy of the CVA could see a rise in the popularity of the Restructuring Plan for the mid-market.
Resolution of pandemic rent arrears
March is currently scheduled to see the end of pandemic-related restrictions on landlord enforcement. They were put in place from March 2020, essentially to allow commercial tenants some relief from having to pay rent during the lockdowns and closures - which were the feature of the early part of the pandemic. Despite a commitment to avoid further lockdowns as much as possible from the government, the restrictions remain in place and will not be released until new legislation to deal with the potential compromise of commercial rent arrears which built up during the worst of the pandemic period. The new legislation will ring fence those arrears and requires one of the parties to refer their case to an arbitrator who will then consider the parties’ situations and make an award. The arbitrator must take into account the viability of the tenant’s business and cannot make an award which would render the landlord insolvent. The government estimated in September 2021 that about 70% of commercial rent which was due between March 2020 up to then had been collected. Parties only have six months from the commencement of the legislation to refer their case to an arbitrator in an attempt to deal swiftly with the arrears. The legislation is expected to come into force on 25 March 2022 following which the blanket restrictions on landlords exercising CRAR or forfeiture will be lifted.
The rise of the new Moratorium procedure?
Current restrictions provide that creditors cannot present a winding up petition for a debt worth less than £10,000 and even then, without first giving the debtor 21 days to pay and the opportunity to make proposals for payment. Those restrictions are also due to be lifted at the end of March which could herald a need for debtors to consider using the new Moratorium process which was introduced in the summer of 2020. The process has been little-used since its introduction possibly because of the government-imposed moratorium which has been in place since then. Once the ‘gloves are off in April, businesses may need to use the Moratorium to give them the breathing space of up to eight weeks to protect them from creditor action while they restructure their affairs. The process is not intended to be used prior to an insolvency process, but to allow a company time to prepare a CVA proposal or Restructuring Plan to be put to its creditors, or simply to refinance its borrowing so that the company survives as a going concern. The process has only been used 15 times since June 2020, so perhaps 2022 will be the Year of the Moratorium.
Directors’ conduct under scrutiny
Directors will come further under scrutiny this year as the new Insolvency Service powers to disqualify directors of dissolved companies come into force in February. The powers have been introduced ostensibly to pursue those directors who took loans under the government’s BBLS but then siphoned the money out of the business and dissolved the company before any more could be done to stop them. However, the new legislation closes a long-standing loophole and will remain to be used long after the issues with fraudulent use of BBLS money have gone. As the government scrambles to recoup as much money as possible following the COVID crisis, we can expect disqualification proceedings to increase as the government exercises its new powers.
The Supreme Court will consider the subject of directors’ duties in its judgment in the case of BTI 2014 LLC v Sequana SA and others. The Companies Act requires directors to promote the interests of the shareholders of a company unless there is legislation or a rule of law requiring them to change that focus to promoting the interests of the creditors. The wrongful trading provisions in the Insolvency Act require directors to cease trading where there is no reasonable prospect of avoiding insolvent liquidation unless they can show they took every step to minimise losses to creditors. The so-called twilight zone, when a company is trading during financial difficulties but is not quite yet at the “no reasonable prospect of avoiding insolvent liquidation” point, has long been a precarious place for directors to navigate as it is unclear in whose interests they have to act. The Supreme Court has been asked to clarify when the directors’ focus should switch from shareholders to creditors and as the case was heard in May last year, the judgment is hotly anticipated.
As with all walks of life, uncertainty prevails as to when the world of restructuring and insolvency will get back to normal. Much depends on the government and when it brings its support measures to an end, which is rumoured to happen in the spring. Once the predicted initial flurry of spring cleaning of so-called zombie businesses has died down, there should be a clearer picture of where businesses are - and how to move forward.
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