It’s the beginning of Spring and the lighter days and nights and clocks moving forward an hour genuinely give off the feel of a new year really beginning.
This March is going to be especially interesting from an insolvency point of view thanks to some changes that are going to have potentially big ramifications for hundreds if not thousands of businesses.
Firstly, the current restrictions on winding up petitions will be finally removed at the end of March.
They’re currently suspended for collective debts worth less than £10,000 and even if they meet this threshold, debtors still have to be formally written to so that they have a 21 day window to respond.
They can then either pay off the debt in full or make other realistic and appropriate payment arrangements to the creditor.
Many professionals and analysts awaiting the outcome of the change generally think that this will see a rise in the number of compulsory liquidations as a direct result but there could also be a rise in the use of a relatively new process called the insolvency moratorium too.
First introduced in the summer of 2020, there have so far only been 15 official uses recorded so far but the ability to allow a business to “pause” creditor action and give them a breathing space of up to eight weeks while they either raise additional finance, prepare a company voluntary arrangement (CVA) proposal or restructuring plan to be put to creditors is definitely a useful option.
Another change that could see an increase in the use of moratoriums and even a possible decline in the use of CVAs is the reintroduction of Crown Preference in insolvency cases.
A CVA allows directors to combine their total debts to creditors into one manageable debt total that is paid off monthly, usually over a term of five years.
Creditors can decline this plan and risk receiving a far lower amount, if anything, if the company goes into liquidation or they can accept this increased certainty of income and in return will often agree to write off a proportion of the total debt. Once the CVA is completed, all debt claims are settled.
It’s a useful tool to build consensus among creditors and also allow otherwise viable businesses that have incurred unsustainable debt during the pandemic era to have a clear way back to rebuilding a profitable business.
However, some analysts see the attractiveness of CVAs being diminished through the return of crown preference.
What is crown preference?
In a liquidation process, the insolvency practitioner in charge has to understand the preference order of creditors – which ones will be paid first.
These are usually classified as secured, preferential and unsecured creditors.
Secured creditors are those that hold security over a loan or asset belonging to the business such as mortgage or secured loan.
The next level of creditors to be paid are preferential which now includes HMRC but also includes company employees.
Remaining creditors are classed as unsecured and are the last to be paid out of the remaining funds after secured and preferential creditors are repaid.
In the 2018 budget, the Chancellor confirmed that certain outstanding tax debts would move from unsecured to preferential status meaning HMRC would be paid out earlier and in larger proportion than other creditors debts.
Official estimates from HM Treasury assume that up to £185 million a year could be recouped through this change – which to use one example is quite small compared to the expected loss of £4.3 billion through unrecovered bounce back loan fraud.
This small change could end up making CVAs far less appealing than previously.
Under the new creditor preference regime, If a small business proposes a CVA then they would need to include payment in full of all employer National Insurance Contributions (NICs) and potentially accumulated VAT before any unsecured creditors receive a penny.
Because a CVA still requires a 75% majority of creditors voting in favour in order for it to be accepted and because HMRC has to be paid in full first, this makes it more unlikely that unsecured creditors will vote to approve a proposal in which their payout is diminished and could be virtually nothing.
It’s one thing to ask them to support a business undergoing financial difficulty while it recovers but another to ask them to consider a higher chance of bad debt with a diminished return, if any.
Only 115 CVAs were recorded in 2021 which is only 0.8% of total corporate insolvencies for the year. In 2020 there were 278 CVAs and 355 in 2019 which was approximately 2% of the overall total which indicates the scale of the annual reduction.
Restructuring plans – by court order
Another event scheduled for March which could have an impact on CVA’s is when the Court of Appeal hears a challenge against a CVA instigated by New Look.
In May last year, the High Court heard a case brought by New Look’s landlords against the business, challenging the CVA both in its legality and overall fairness of their use by insolvent retailers to restructure lease liabilities.
The court rejected the complaint which solidified the continuing use of CVAs to reduce the levels of rent a company is obliged to pay over a particular period.
One aspect of the New Look CVA which was the use of a court approved restructuring plan which overrides the views of some creditors in order to bind all to an agreement – also snappily known as a “Cross Class Cram Down”.
The initial New Look decision upheld the use of CVAs in this way while the appeal finding will clarify matters further.
While we await the verdict, The Insolvency Service announced that it will carry out academic research into the treatment of property owners in CVAs compared to other creditors.
While the outcome of this research will be at least a year away, it could indicate a change of view on how CVAs should be used in future.
Any restriction on the use or overall favorability of CVAs could see a rise in the use of these restructuring plans but what the combined effect of both this factor and the return of crown preference could be remains to be seen.
Looking at the annual corporate insolvency statistics for 2021, there are some possible clues.
CVAs and administrations are both down on their 2020 totals but creditors voluntary liquidations (CVLs) have jumped 134% year-on-year to 12,668 which is not just the second highest total recorded since 2015 but also the third highest seen since 2006.
This indicates that more business owners and directors are choosing to close their businesses down and liquidate them, even if there is a chance that they could be restructured or rescued.
A company voluntary arrangement could turn a bad Spring into a good one
Most people hope that March will finally bring a return to some recognised normality and this might actually be the case.
But the changes and events we’ve highlighted here show that nothing can be taken for granted and that sudden changes in circumstances can often necessitate a change in strategy to achieve the best results.
What was the best option for a business in financial difficulties in 2020 and 2021 might not be best in 2022 – before or after March.
One choice that will always remain as the most important is to get some advice before making any decisions about your company.
Our free initial consultation for any director or business owner remains a crucial first stage in understanding the issues facing the firm and being able to create a roadmap ideal for them, based entirely on their situation and circumstances.
A CVA might be the ideal solution for one company but not for another – the options and choices available will always vary but taking the first step and talking to us is always a wise course of action.