Temporary insolvency protection begins to phase out

The government has officially announced that temporary measures brought in to support businesses from insolvency during the pandemic will be phased out beginning on 1 October.

The Corporate Insolvency and Governance Act 2020 took effect in June of 2020 to protect companies suffering COVID-related hardships from creditor action. 

The measures are intended to ensure that viable businesses affected by the restrictions on trading during the lockdown periods were not unnecessarily forced into insolvency. 

With the economy showing signs of recovery, the government is lifting the ban on creditor actions, but it acknowledges that small businesses are still in need of help. 

New measures are being instituted to give small firms more time to recover before creditors can take action to wind them up. The legislation targets high street businesses and the hospitality and leisure sectors, which have been particularly hard hit during the pandemic.

The new law temporarily raises the current debt threshold for a winding up petition to £10,000 or more and requires creditors to seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with a winding up action. It will be in effect until 31 March 2022.

The new measures will be introduced through a Statutory Instrument and will cover England, Scotland and Wales. Northern Ireland will implement similar legislation to mirror the measures.

Business Minister Lord Callanan said: “The success of our vaccine rollout means we are seeing life and the economy returning to normal with a strong rebound, and the time is right to lift the insolvency restrictions that were needed during the pandemic.

“At the same time, we know many smaller businesses are rebuilding their balance sheets and reserves, and some will need more time to get back on their feet. These new protections will help them to do that.”

Restrictions remain in place on commercial landlords presenting winding up petitions against limited companies for accrued unpaid rent. 

Commercial tenants will continue to be protected from eviction until 31 March 2022, and the government is in the process of implementing a rent arbitration scheme to deal with commercial rent debts that built up during the pandemic.