Commentary: Ticking time bomb as temporary pandemic support for businesses comes to an end

As of March 1 of last year, companies have been protected by a ban on insolvency action by creditors if it is reasonable to believe their debts stem from the financial impact of Covid-19.

Since this law was put in place, creditors have not been able to sue in insolvency to collect their debts, which has had a ripple effect on businesses across the country. This has helped many businesses which – due to the legislation – were able to survive a tough time, but it also meant that many “zombie” businesses with no realistic prospect of avoiding long-term insolvency may have delayed the inevitable and avoid insolvency while also gaining government support through measures such as leave and rebound loans.

From October, businesses with debts of £ 10,000 or more will be forced to pay their creditors within 21 days. If they do not pay or are unable to provide acceptable payment proposals, they will run the risk of going into receivership.

Then there is an additional risk of potential personal liability for directors found guilty of “illicit transactions” by allowing their business to continue to trade and, in so doing, incur additional debt to creditors while they are not there. had no reasonable possibility of avoiding insolvency.

This change could herald one of the busiest markets for insolvency practitioners since the bank crash of 2008. These changes will allow the insolvency industry to continue its work to save as many jobs, after 18 months of virtual void with the number of insolvency cases considerably compared to pre-pandemic levels due to the success of the various government support measures available.

Managers of businesses with bad debts have a few days to act – if immediate payment isn’t possible, businesses will need to look to arrange a payment plan or make some other informal arrangement with creditors. Otherwise, there could be a widespread increase in the number of business insolvencies with a significant increase in the number of business closures, leading to increased layoffs and unemployment levels as well as an increase in non-payment of taxes. and government-backed loans.

The good news, however, is that insolvency can be preventable – if the directors of these companies take the appropriate and early advice from a suitably qualified professional.

Besides the introduction of temporary measures, the Insolvency and Corporate Governance Act also introduced new restructuring processes such as statutory moratorium and restructuring plan which together with established processes such as CVAs and administrations , can offer companies that are fundamentally sound but need the time to recover from the effects of the pandemic a lifeline of additional time to pay their creditors or to restructure the burden of their debt.

Good news for indebted businesses is that arrears of commercial rents are exempt from insolvency measures at least until the end of March 2022, with commercial tenants protected against insolvency and eviction for non-payment of rent. But this respite from creditors’ action may only be temporary for companies in sectors most affected by the pandemic, which may now face further pressures from external factors such as shortages of resources. supply, upcoming increases in national insurance levels and a gas crisis. supplies and prices.

Add in a myriad of difficulties stemming from Brexit, which may or may not be temporary, and a predicted increase in the number of cases of Covid and other seasonal illnesses and even the most optimistic may find it difficult to see anything other than a winter of extreme difficulty for many British companies.

Many experts also believe that the continued protections offered to commercial tenants will be a factor that in turn will lead to a crisis for commercial property owners. Walk down any main street or walk through any mall, big or small, and the effects of moving from Main Street to online retail, compounded by the effects of long-term blockages, can easily be seen. in the number of empty retail units, including many multi-site retailers.

Finding replacement tenants for these units to return to pre-pandemic occupancy levels will be extremely difficult for landlords, and conversion to housing is likely to be a viable option for a few of them.

The situation can only get worse for business owners when the long term effects of the shift to working from home begin to be felt in the office market. If the norm is that businesses with downtown offices require their employees to come to the office two or three days a week, then these businesses may well be looking to reduce their space requirements by more than 40% as soon as one break during the term of their lease allows them to do so. At this point, the viability of many business owners will be in doubt. Many of these homeowners are of course heavily backed by commercial loans from the big banks and other commercial lenders – someone up for a new banking crisis?

October is fast approaching and when it does the business landscape in Scotland will be completely different. Although many businesses are liquidated, it is important that those who wish to continue operating receive the advice they need to find a solution and continue to negotiate after September 30.

– Alistair Dickson is Director and Head of Scotland at SKSi, which provides expert insight and advice to guide businesses through potentially difficult times in this ever-changing economic environment.