Corporate insolvency in 2021

Our experts discuss the picture across all three UK jurisdictions 


After a period of significant inactivity as a result of the various temporary measures introduced during the pandemic, we are now approaching an insolvency cliff edge in the UK. In this video, senior restructuring and insolvency lawyers from TLT’s Scottish, Northern Irish and English offices discuss:

  • The factors that may influence when and why we might see corporate insolvencies rise again in the second half of the year;
  • The key sectors that will be affected as restrictions on enforcement action are eased;
  • The likely uptake of the new restructuring plan in each of the jurisdictions, and how this may compare to the use of CVAs and schemes of arrangement;
  • The new conditions on pre-pack sales to connected parties currently in force in Great Britain, and due to come into force in Northern Ireland in June; and
  • The potential impact of the reintroduction of Crown Preference, particularly on the actions of secured lenders.

Corporate insolvency in 2021

Transcription

Alan Munro:

Hello, I'm Alan Munro, a Restructuring and Insolvency partner in TLT's Glasgow office. During this virtually recorded Fireside Chat, we are going to discuss corporate insolvency processes and explore how they differentiate across the legal jurisdictions of Northern Ireland, Scotland and England and Wales. Now, there's been a lot of change in the corporate insolvency world over the last 12 months, particularly with the introduction of the Corporate Insolvency and Governance Act last year which introduced a standalone moratorium and a new restructuring process and, of course, Brexit which took place on 31st January 2021 and the implications there where we essentially taste a hard Brexit in restructuring and insolvency.

Alan Munro:

And there's more change to come. Many of the temporary measures designed to protect businesses who were introduced by CIGA are due to expire on 30th June 2021. It remains to be seen what effect this will have and that's something we'll be exploring in this chat. So to introduce our speakers, if we can start with Jason, take it away.

Jason Byrne:

Thank you, Alan. Hello everyone, my name is Jason Byrne and by way of a very quick introduction, I am a partner in our Belfast office. I deal with all aspects of personal and corporate insolvency and regularly act for insolvency practitioners, creditors and debtors alike, both in an advisory context and in terms of insolvency litigation. And I have the slightly unique advantage of having worked in a local insolvency practitioners office here in Belfast for 15 years before joining TLT.

Ainslie Benzie:

Hi there, I'm Ainslie Benzie, I'm a Legal Director in the Scottish team, specialising in corporate restructuring and insolvency.

Peter McGladrigan:

Hey there, I'm Peter McGladrigan, I'm a Legal Director in our Scottish team in our Edinburgh office and I specialise in insolvency, commercial litigation and dispute resolution.

James Forsyth:

James Forsyth and I'm Head of Banking and Restructuring at TLT.

Abigail Hadfield:

Hi, I'm Abigail Hadfield, I'm a partner in the Bristol office with a focus on non-contentious restructuring and insolvency work.

Caitriona Morgan:

Hello, I'm Caitriona Morgan, I'm a Legal Director in our Belfast office and I have a focus on all personal and corporate insolvency matters.

Alan Munro:

So that's the team, now onto the questions. Let's start with insolvency activity. I think it's safe to say we've experienced a significant period of inactivity but Caitriona, how have you found that in Northern Ireland?

Caitriona Morgan:

Yeah, Alan, we'd completely agree with that. There has been an enormous reduction in the number of corporate insolvencies. To put this into perspective, in March 2021 we had seven in Northern Ireland, most of those being CBAs. The primary reason for this really is the CIGA legislation which you mentioned earlier and the moratoriums that have been put in place in terms of creditor winding-up petitions so they're due to current moratoriums due to expire at the end of June so we're really just on a watch and see brief to see whether or not they will be extended or whether they will be uplifted.

Ainslie Benzie:

Yeah, Caitriona, I agree from a Scottish perspective. Much like the rest of the UK, we've seen a significant decrease in insolvency levels over the last year and even those business-as-usual insolvencies which simply arise as a natural consequence of life in business have reduced and we know that isn't because of business has been good for everybody so you're absolutely right, it's been a direct result of the CIGA legislation and the moratorium on creditor enforcement which has been imposed during lockdown from March 2020. So whilst holding the effects of pandemic-induced shutdown, it'd be these protections have kind of had a wider effect of preventing the natural shedding of failing businesses and this has definitely been evident in the current insolvency statistics.

Abigail Hadfield:

I'm a very similar picture. In England and Wales, the Coronavirus Support Schemes of the government have been very effective in that sense, shoring up businesses at least for the moment which otherwise would have failed.

Alan Munro:

Now, do we think that there's going to be any change soon?

Jason Byrne:

Yes, in Northern Ireland I think we're fast approaching that time, Alan, when we'll start to see the real impact of the pandemic on our local businesses here. One of the main factors, as Caitriona mentioned, is the removal of the current restriction on presenting creditor winding-up petitions introduced by CIGA. It's been extended several times and remains in place at the minute until 30th June. In my experience, the single biggest driver behind businesses seeking to restructure or enter into an insolvency process is pressure from creditors. At the minute in Northern Ireland, credit winding-up petitions have been on hold since March last year so that creditor pressure has been largely non-existent.

Jason Byrne:

And without that motivation, businesses simply have delayed making any decision on their future and as Abi mentioned, there's been the various supports that they've been able to avail of such as furlough, C Bills, the suspension of wrongful trading. But as those start to lift and things start to creep back to normality, there would be a lot of companies that are now forced to making decisions about how they deal with their legacy debt and the feasibility of their businesses going forward.

Jason Byrne:

So unfortunately, the expectation is that many businesses will simply be unable to continue trading and even those that are able to open up again, it may not be sustainable in the long term so all of this is inevitably going to lead to increased activity in the insolvency market. According to the Insolvency Service statistics for Northern Ireland, in the 12 months before the pandemic, there were a total of 364 corporate insolvencies here, of which 229 were compulsory liquidations. In the 12 months after the pandemic, there has only been 80 corporate insolvencies in total and only five of those were compulsory liquidations so increased activity is inevitable once these petitions start working through the court system again.

Alan Munro:

Yeah, no, I'd agree with all that from a Scottish perspective as well and I suppose the key drivers will be what happens with the furlough scheme, all the civils and bounce back loans, their directors are going to be getting letters through their door saying, "When are these going to be repaid?" And as you say, with the hold being placed on creditor petitions being lifted, we would expect that might create a deluge. It will be interesting to see what the position of banks and HMRC will be and whether they're going to be aggressive in pursuing debt recovery policies.

Abigail Hadfield:

Yeah, I mean in England and Wales, we attended a recent webinar with senior judiciary. The view given was that the protections from enforcement were probably unlikely to be extended again but we'll have to wait and see. What will be critical clearly is how business have used the support that they have been given. Have they been able to use it to ensure their mid-term future or has it just plugged a hole with nothing left to trade on with once restrictions lift?

Alan Munro:

And do we see particular sectors in various jurisdictions being most likely to be distressed?

Jason Byrne:

Well, it's probably hard to envisage a sector that has not been affected to some degree, even the ones that have on the face of it thrived, have had to make some adjustments. But in terms of the most severely distressed sectors, for me that is easily hospitality, leisure and retail sectors. We have a huge number of pubs, restaurants, cafes, shops, gyms throughout Northern Ireland that have done very little if any business over the last 14 months and that's a huge amount of ground to make up. And as I said before, remains to be seen whether they can all successfully reopen and pick up where they left off, I suspect not.

Jason Byrne:

From a purely operational point of view, it's not simply a case of just opening the doors and traded as you've done before. The ability to trade at a profit is going to be significantly curtailed by all of the additional overheads in having to comply with government guidance and then continued to adjust as that guidance moves. And certainly in terms of shops and restaurants, a reduction in permitted customers in the short to medium term is going to impact on turnover and these are all industries where the profit margins are traditionally small and normally rely on volume and high footfall so minor increases to overheads and minor reductions in turnover can have severe and damaging impacts.

Jason Byrne:

And then related to this, I don't think it's unique to Northern Ireland but our international tourism market was absolutely flying pre-COVID and it was a huge contributor to the local economy. So great to see restrictions lifting and businesses being able to start to trade again but I think it will be a long time before the Northern Irish economy gets the benefit of that tourism market again. Now that's going to be offset a little bit by people probably preferring to stay at home and staycations maybe this summer but that is not going to plug the gap entirely. So unfortunately, I think it's all of these types of businesses that are really going to struggle in the next 12 to 18 months.

Alan Munro:

Yeah, and do we see that in any other jurisdiction out there? How about Scotland?

Peter McGladrigan:

Yeah, thanks Alan. Very much the same as it is in Northern Ireland, hospitality and leisure is the sector that has been most severely affected by the pandemic due to its reliance on both discretionary consumer spending, social interaction. The sector comprises numerous sub-sectors including hotels, travel, tourism, sports and leisure. Even with the easing of lockdown, many businesses are going to struggle just to break even and they face significantly increased operational costs to make their venues COVID-secure. Too many sectors, sub-sectors in hospitality and leisure to go into too much detail. Hotels for me are the most obvious sub-sector which has been badly affected by the pandemic due to the lockdown obviously and slowing down of international travel and tourism. Many hotel businesses are carrying a significant debt burden and lack working capital. These businesses will need to pay back rent, tax deferrals as well as the government backed loans such as the C Bills. Once the job retention scheme begins to unwind, I would fully expect to see hotels looking to enter into lease negotiations with landlords. They will be looking at debt restructuring and also into CBAs so to my mind, hospitality and leisure is definitely the worst affected sector, Alan.

Ainslie Benzie:

And from a Scottish perspective, everything that Jason said about retail is exactly the same and I suspect it is the case across the UK. You combine the current economic climate and position together with the wider swing towards online shopping, I think it is only going to continue to see retail businesses restructure, reduce their physical presence to only the most prime and profitable sites whilst investing in expanding their online presence. So perfect examples of these shifts are the ASOS and Boohoo acquisitions of the Arcadia and Debenhams brands which have all moved to online only platforms and the current New Look CBA which sees its fashion operator seek to shrink its physical presence from high street even further. And another point just to note from a Scottish perspective is which is showing early signs of financial distress, the construction sector due to a mixture of increased material cost as a result of Brexit and an extremely unstable supply chain. It is also interesting to note that the construction sector is the largest recipient apparently of government-backed loans so there is going to be some really challenging times ahead for these businesses.

Abigail Hadfield:

Yep and other sectors potentially under real pressure are likely to be education, Further and Higher Education institutions of all sizes, particularly those that have relied on overseas income for obvious reasons and also healthcare, staff exhaustion and wellbeing and the staffing difficulties posed by Brexit are a couple of obvious factors that could start to take their toll in that sector too.

Alan Munro:

We are trying two of the new insolvency regimes as used by CIGA, that is the restructuring plan and the moratorium. What sort of uptake are we expecting for those?

Jason Byrne:

Well in Northern Ireland, Alan, it has been enforced here now for just over 10 months and I am not aware that either has been taken up here yet, there has certainly been no publicity around it. In my opinion, both are really progressive welcome additions to the restructuring toolbox for IPs and certainly the early case log that continues to come out of this area from the English courts makes for interesting reading, especially in the terms of the courts' ability to bind dissenting creditors in Part 26A plans.

Jason Byrne:

But I think the reality is, in terms of Northern Ireland, we simply do not have enough large corporate entities to make these new options overly popular choices. I certainly look forward to the first one that arrives on my desk but I think the reality of our local economy is dominated by SMEs, roughly nine out of every 10 businesses here have less than 10 employees so we have a huge reliance on small business enterprises. And given that Part 26A plans require court involvement from the outset and they are likely to be more expensive than say the alternative restructuring tools of CBAs, I expect the CBA route will still be the restructuring tool of choice for the majority of our distressed businesses.

Jason Byrne:

In terms of the standalone moratorium, probably a slight possibility that will be taken up going forward, especially when court activity ramps up and distressed businesses require some more time to explore their options. But again, because it creates an additional layer of cost in terms of the core doctrication and the appointment of the monitor, I suspect that if anything, it will be an option of last resort as opposed to the new go-to approach as a matter of course. So in summary in terms of Northern Ireland, it's good that our insolvency legislation has remained largely aligned to the developments in England and Wales but I do not think it's going to have significant impact on the ground here in my opinion.

Ainslie Benzie:

I think the position in Scotland is very, very similar to what you described in Northern Ireland, Jason. I do not see a prevalence of restructuring plans any time soon in the Scottish market and much like historically there was not a huge uptake in CBAs in Scotland until very recently and even then, with proportional volumes being significantly lower than England and Wales and the moratorium may be used as you say because it's more akin to the SME type market that both Scotland and Northern Ireland find itself in. But I do not suspect it will be used to a vast degree certainly in the next year or two.

James Forsyth:

And it has been a big week in England and Wales for restructuring plans with the Virgin Active plan and I think that is quite a significant point. I think if there had been some real pushback or that failed, there would have been an aversion to CBAs. Although interestingly, it has also been a big week for CBAs with New Look. It will be interesting to see also whether these filter down into the mid market. I don't know, I think at the moment, people are just more comfortable with the tools that they have got. On the moratorium, I think people are not keen simply at the moment to stick a note intentionally in to get the moratorium.

James Forsyth:

CBAs will not go away, they have been further endorsed. With seeing them into the other jurisdictions in the United Kingdom, I agree completely, I think it's less likely that some are going to be sponsored directly through the local courts but of course, there is going to be a number of businesses in England and Wales which also have operations or premises in Scotland Northern Ireland so there is no doubt that the impact is going to be felt in all of the jurisdictions, although they are probably going to be centred out of London.

Alan Munro:

As we know, additional conditions will be imposed on sales to connected parties and I would just be interested to get the panel view on which conditions are likely to be applied across the jurisdictions?

Caitriona Morgan:

Well, I suppose to take it up from Northern Ireland, Alan, the legislation is at the time that we are recording this doesn't apply to Northern Ireland. Like everything, we are normally a few years behind. Hopefully we are not that far behind this time around and it is anticipated that we may have our own regulations to bring these amendments to the pre-pack rules, potentially by the end of June. So at the minute, any proposed administrators dealing with potential pre-packs strictly speaking do not have to engage an evaluator. We have come across a couple of cases recently where the IPs, given the circumstances of the case, have still taken the decision to instruct an evaluator simply as an additional protection tool in the event that there was any challenge to the pre-pack but at the minute, it is still very much just to be determined on a case by case basis.

Ainslie Benzie:

Caitriona, from a Scottish perspective, the new regulations do apply in Scotland from 30th April so we have passed the rule book on when it comes to this now and I think it will just be interesting to see how things are structured. Very much anticipate the use of an evaluator much more so than creditor approval because it sits much better with a proper pre-pack as we know it than actually going and seeking creditor approval which effectively nullifies the benefits of a connected party pre-pack so we will see what happens.

Ainslie Benzie:

But certainly, a lot of professional associations and bodies of insolvency practitioners in Scotland have expressed some concerns around the lack of oversight of the identity of the evaluator and what structures can we put in place to make sure that an evaluator is a fit and proper person to make the necessary assessment. And I've seen some calls for a kind of government-approved list of evaluators, suggesting that it would be better served to do this to aim to protect the aim of the regulations and give stakeholders greater confidence in pre-pack sales so it will be interesting to see how this all plays out and that it will certainly add an extra layer of complication in time scales to any connected party sales going forward in Scotland.

Abigail Hadfield:

Yeah and of course, we are also grappling with the new National Security and Investment Act which is an additional issue that IPs and their advisors are having to take into account now when planning transactions. The regime under that new act is not going to commence fully under the end of the year we are told, through additional statutory instruments but unusually, it is going to have retrospective effect so it's relevant to any transactions completed since November last year. So it is certainly relevant to things that are going on now. But in essence under that new legislation, the government is trying to scrutinize the acquisition of business and assets which are relevant to national security. But as widely commented on in the press, the regime is broad in scope and will apply to a much wider range of transactions than you might think from the title.

Abigail Hadfield:

A lot of detail is still to come on the regime but in short, it involves a similar kind of idea of a prior clearance before the transaction which has to be obtained from this newly created Investment Security Unit which sits within BEIS. There are 17 mandatory sectors for which any transactions fitting the criteria will need prior clearance but it also extends to assets that are outside those sectors but might have a relevance to them so for example, land that is situated near a sensitive site.

Abigail Hadfield:

There is no threshold for transactions so even the smaller transactions could be covered and of course, the main concern for distressed sales is the time delay. If clearance is needed, the government has 30 days to have an initial look at the transaction and decide if further assessment is needed. If a full security assessment is needed, they have a further 45 days. So you can see that that is going to cause tension in the context of pre-packaged sales and other distressed sales where time is critical. Non-compliance with the regime as you probably would imagine has pretty serious consequences.

Alan Munro:

As well the Crown Preference has been reintroduced, making a stunning return from its departure in 2003. How do we expect that to impact on how lenders take security?

Peter McGladrigan:

I think it's fair to say Alan, in Scotland anyway, we have yet to really see how the reintroduction of the Crown Preference is going to impact on how lenders take security going forward. Undoubtedly, it is going to have a significant impact and obviously the floating charge now does not hold the weight it did due to the fact that HMRC now rank above it and that is obviously due to the increase in the prescribed part from 600 to 800,000. This all reduces the recovery under the floating charge and that is no doubt going to have an impact on lender strategy in distressed cases.

Peter McGladrigan:

Lenders are going to be more reluctant to take the risk of providing ongoing support if ultimately their recovery in an insolvency situation is going to be diminished as a result of Crown Preference. Lenders will look to different types of funding such as invoice financing with the security to book that, the insistence on personal guarantees I think, will probably become more prevalent. I would also anticipate that lending criteria, banking governance will become stricter. I would expect that ultimately Crown Preference will have a negative impact on the amount of lending extended by funders and it is also going to inevitably lead to increased pricing.

Peter McGladrigan:

The reintroduction of the Crown Preference really could not have come at a worse time, given the expected number of corporate insolvencies as a result of COVID and the fact that the survival of many companies is so dependent on receiving ongoing funding, the adverse effect will be more keenly felt in Scotland given that lenders rely more heavily on floating charge security than is perhaps the case in England and Wales and Northern Ireland. This is because of the inability in Scotland to rely on fixed charges other than over land and property. It is expected that the Moveable Transactions Scotland Bill will be an early priority of the Scottish Parliament and if that is passed, will expand the ability of creditors to take fixed security over moveable assets and that will considerably dampen the adverse effect of the Crown Preference on lenders. Ainslie, what are you currently seeing in terms of the impact of this on lenders?

Ainslie Benzie:

Yeah, I think you are absolutely right, Peter, in what you have said. What we are actually seeing at the moment with lenders is not for a prevalence of personal guarantee requests but more a tightening of reporting requirements and a focus on cashflow management. So this combined with asset or invoice finance lines in tandem with core term or RSA facilities is the way which lenders in Scotland are currently attempting to spread the risk but they have been actively concerned about this since the reintroduction of Crown Preference was introduced as a concept over about 18 months ago to two years ago so it will be really interesting to see how lending structures develop in Scotland as time goes on and as you said, if legislation comes into place to allow them to use more fixed charge security going forward.

Caitriona Morgan:

Yes, Alan, in Northern Ireland we are seeing the same thing, the lenders are certainly looking at alternative types of security in addition to floating charges, depending again on the nature of the business and the security which they need. Obviously, one of the greatest concerns around the time that the Crown Preference was initially introduced was the potential requirements for the lenders to have to keep seeking updates from borrowers in terms of what the potential Crown liability may have to be and how this would have to change their lending practices in general, in terms of compliance requirements from borrowers to ensure that there was a minimal revenue liability.

Caitriona Morgan:

So I think we will be watching to see how aggressive perhaps the revenue become over the next 12 to 18 months and whether they potentially try and take advantage of the new position or whether or not they will still hopefully continue to engage in restructurings to try and get the best outcome.

James Forsyth:

It was interesting that there wasn't the avalanche of enforcement that might have been at least made financial sense immediately before they came into effect so I think that probably is useful, an indication of how the lenders are going to respond to it. Also frankly, to what extent lenders attach a huge amount of value to floating charge realizations anyway may well drive behaviours. It will be interesting to see a lot of deferral of tax liabilities, how that is going to impact on recoveries in the future with Crown liabilities possibly significantly higher than would ordinarily be expected in the usual period of trading.

James Forsyth:

But at the same time, fixed charge security and fixed charge lending is generally more capital-efficient anyway so there was a move in the markets more that way anyway so maybe this is just going to further accelerate that. And also with a number of the newer lenders to the market and loans with coronavirus business support accreditation, a number of those will focus more on the fixed charge type lending anyway so it is probably just there is more of a facilitation of the transfer of lending away from floating charge more to fixed charge which was the direction of travel anyway.

Alan Munro:

Well, many thanks everyone for your time. Next time, we will be discussing personal insolvency processes and we would encourage you to take some time to watch that too. Please get in touch with us if you have any questions relating to this discussion and we will see you on the next call.

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