Following the Chancellor’s Budget back in March, the scale of the shock to the UK economy as a result of covid-19 is now clear. Covid-19 is now estimated to have reduced gross domestic product (GDP) by as much as 10% in calendar year 2020.

And yet despite this apparent doom and gloom, corporate insolvencies appear to tell a different story. The latest figures from the Insolvency Service report corporate insolvencies fell by 9% to 686 in February 2021 compared to January’s figure of 754 and 49% lower than February 2020’s figure of 1,348. 

It sounds counter intuitive to the broader narrative on the impact the pandemic. But we are seeing the impact of an activist government supporting businesses across two fronts – financial support and the temporary suspension of pre-existing corporate insolvency and governance legislation.

Financial help

At the heart of the new support package lies the Recovery Loan Scheme, designed to ensure businesses of any size can continue to access finance up to £10m per business once the existing Covid loan schemes close.

Support

There is no doubt that the economic impact of the pandemic and the disruption to businesses cash flows has lasted longer than anyone expected. There is little certainty on when businesses can return to pre-pandemic operating levels. As a result, the UK government needed to provide as much support as possible to ensure businesses stay afloat. Given the scale of government-backed loans now sitting on balance sheets, short term cashflow concerns may have dissipated for many but the hangover will now begin to be felt over the next six months. VAT deferments now need repaying, loans need servicing, staff need to be bought back off furlough, and rent arrears need settling.

Extending insolvency protection

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021 has extended the key measures in different ways:

1. The suspension of liability for wrongful trading has been extended until 30 June 2021 for directors who continue to trade a company through the pandemic with uncertainty as to whether their company may be able to avoid insolvency in the future.
2. The prohibition on termination clauses is also extended until 30 June 2021, although small suppliers will remain exempted from the obligation to supply.
3. The relaxation of entry requirements into the new moratorium procedure will also be extended, in this instance until 30 September 2021.
4. The continuation of restrictions on statutory demands and winding-up petitions until 30 June 2021.

One key measure is continuing with temporary suspension of wrongful trading, which provided company directors with much-needed breathing space.

Challenges post-lockdown

Although the easing of lockdown measures is picking up pace numerous challenges lay ahead, particularly with the expected long-term reduction in consumer demand and confidence. Many company directors will likely face challenging decisions over whether to continue trading or instigate an insolvency process in the coming months.

If directors are worried that their business is in or expecting financial difficulty, it is crucial that they continue to consider the needs of all key stakeholders and creditors in any decision and maintain ‘good housekeeping’ in the form of board meetings and keeping records of actions taken with an assessment of the reasons for certain decisions. Where possible, they should also seek appropriate professional advice.