Join TLT’s insolvency and restructuring specialists as they delve into the similarities and differences in personal insolvency law and practice across the three UK jurisdictions in 2021.

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.  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 personal insolvencies rise again in the second half of the year;
  • The potential impact of the Breathing Space scheme in England and Wales, whether it may be introduced in Northern Ireland, and any lessons that can be learnt from the Scottish experience of the moratorium on diligence;
  • The increasing popularity of IVAs and protected trust deeds, and the increasingly sophisticated debt advice market that may be leading to a move away from formal personal insolvencies; and
  • The anticipated increase in insolvency litigation, both because of the pressure to maximise recoveries in a difficult market and the growth of litigation funding options.        

Date published

10 June 2021

Personal insolvency in 2021

Transcription 

Jason Byrne:

Thanks, Alan. Hi everyone. My name is Jason Byrne, I am a partner in TLT's Belfast office.

Ainslie Benzie:

Hi there, I am Ainslie Benzie, I am a Legal Director in TLT's Scotland office.

Peter McGladrigan:

Hi there, I am Peter McGladrigan, I am a Legal Director in our Scottish team, I specialise in insolvency, commercial litigation and dispute resolution.

Caitriona Morgan:

Hello, my name is Caitriona Morgan and I am a Legal Director in our Belfast office.

James Forsyth:

I am James Forsyth, I am Head of Banking and Restructuring nationally for TLT.

Abigail Hadfield:

And hi there, I am Abigail Hadfield, I am a partner based in the Bristol office, specialising in non-contentious restructuring and insolvency.

Alan Munro:

And that is the team. So let us start with insolvency inactivity levels, is it safe to say that we are experiencing a period of significant inactivity?

Caitriona Morgan:

I will take this from Northern Ireland, Alan. First of all, yes, absolutely. We had eight bankruptcies in March 2021. The reason that there is such a low level of bankruptcy and personal insolvencies in Northern Ireland is quite a unique position compared to England and Wales and Scotland. So whilst the provisions of CIGA restricting winding-up petitions apply here, we have one bankruptcy master who sits on our High Court and she deals with all of the personal and corporate insolvency matters. During the pandemic and since the original lockdown back in March 2020, our bankruptcy master has issued a number of practice direction which are essentially the rules relating to what applications she can and cannot accept within her court and one of those is that there has also been a moratorium placed on creditor bankruptcy petitions.

Caitriona Morgan:

So this has had a huge knock on effect in terms of the ability of creditors within Northern Ireland to issue bankruptcy petitions and really, the reason for this primarily is having regard to the resources available to the courts and indeed the Insolvency Service locally in dealing with any petitions during the lockdown, particularly over the past year. So again, it's a wait, watch and see to see when those will be lifted but at the minute, there is very limited activity here.

Alan Munro:

Peter, what are you seeing in the Scottish market?

Peter McGladrigan:

Again, Alan, it's very much the same from a Scottish perspective in terms of activity levels. The number of personal bankruptcies and protected trust deeds were a third lower in 2020 than in 2019 and that downward trend is continuing. The reason for the drop off in activity, well there was a raft of legislation enacted by the Scottish Parliament at the beginning of the pandemic last year and that has made it a lot more difficult for creditors to get paid.

Peter McGladrigan:

The first Coronavirus Scotland Act 2020 increased the statutory moratorium on diligence in bankruptcy from six week to six months. Once a debtor has enrolled themselves into a moratorium, it is not possible for a creditor to commence bankruptcy proceedings against the debtor. There were 778 applications for moratoria granted in the first quarter of this year. That is 500 more than the figure granted in the same quarter last year so you can see that debtors are really taking advantage of this protection. The act also removed the prohibition on debtors applying for more than one moratorium in a 12 month period so as matters stand, a debtor can effectively enrol themselves in a perpetual moratorium, rendering them actually untouchable to creditors.

Peter McGladrigan:

And talking of the changes to the statutory moratorium, the second Coronavirus Act was passed by the Scottish Parliament and that increased the debt limit for personal bankruptcies from £3000 to £10,000 and as you will appreciate, the £10,000 limit is a substantial barrier for most creditors, especially in the consumer credit space. A lot of business debt is less than £10,000 as well and so the increased threshold has removed bankruptcy as an option for a lot of creditors.

James Forsyth:

We had no moratorium, no formal moratorium in England and Wales so that hasn't automatically brought matters or reduced the numbers going through the courts but many lenders have imposed their own moratoria which has undoubtedly had an effect on the number of creditor and debtor petitions going through the courts. I think it's fair to say though that courts have gone to real extreme efforts to keep the administration of justice going so those petitions that have been issued have been continued and haven't been gummed up in the system. I think going forward, the perception of wealth is interesting with the housing market really going through an increase or an bubble depending on how you want to look at it. It will be interesting to see how that impacts on future... People feeling that they need to go through a formal insolvency process of bankruptcy rather than something else.

Alan Munro:

So do we think that things are going to change any time soon?

Caitriona Morgan:

From the Northern Ireland perspective, yes, Alan, I think that is inevitable. Whenever creditor petitions are allowed to be presented in court again, I think there is going to be a twofold knock on effect because there is already a number of bankruptcy petitions that are currently in the system that were put on hold so they will have to be dealt with but then there will also be potentially an avalanche of new creditor petitions of aggrieved creditors who have perhaps been sitting biding their time over the past year until they are allowed to issue bankruptcy petitions again. So I think there is perhaps two sources where we are going to and do anticipate to see an increase in numbers from.

Caitriona Morgan:

As Jason alluded to in the corporate recording which we have just done, a large proportion of our Northern Ireland economy in terms of business's RSM means and the reason why that is important in terms of the bankruptcy proceedings and what we anticipate to come out of this is that there are a lot of sole traders and there are a lot of people relying on these sole traders for employment. So for example, recent figures at the end of March showed that there were still 100,000 employees in Northern Ireland availing of the furlough to some extent. So whenever the protections, I think, are lifted by the government, it is going to be a tell-tale sign in terms of whether or not there will suddenly be an impact of potentially debtor petitions and creditor petitions again.

Caitriona Morgan:

We have lost, obviously we have Debenhams, all the stores closing this weekend which would employ a lot of people locally. Recently, we have had the announcement from GAP that they are pulling out of Northern Ireland and these things are not going to be limited to these businesses. This is something that has happened across the border already and will continue to happen so we definitely think that there are a number of factors in play here that can only inevitably increase the activity over the next 12 to 18 months.

Peter McGladrigan:

Yeah, from a Scottish perspective, I think the temporary measures introduced by the acts, they are set to come to an end on 30th September of this year. Some insolvency practitioners are predicting that the threshold for bankruptcy petitions is not going to go back to £3000 but that is just speculation at this stage. It is expected that the statutory moratorium will be revert back to six weeks and the prohibition on applying for more than one moratorium in a 12 month period will be reinstated but it remains to be seen what is going to happen at the end of September. Crystal ball gazing, I think most people agree that personal insolvencies will inevitably increase by some considerable margin at some point this year. That is assuming the deadline of 30th September for the end of the temporary measure is not extended yet again.

Peter McGladrigan:

Some sectors such as hospitality and leisure have obviously suffered very badly as a result of the pandemic. Once furlough ends in October, it is inevitable that the unemployment rate will rise and that will partly be as a result of some workers in most sectors losing their jobs unfortunately. So we are predicting that unemployment will rise to around 8% in the coming months, it is currently 4.5% so that is quite a jump. So I think it is really a question of when and not if the personal insolvency figures will increase.

James Forsyth:

Yeah so the end of the furlough scheme is undoubtedly going to impact the personal debt position in England and Wales as well. We are also seeing now a number of the lenders lifting their informal moratoria which is only going to lead, well in a way it will be interesting to see quite how aggressively those are pursued and whether it is a bankruptcy but certainly, with pressure increasing, you can see an increase in deaths positions. Also, as we have talked about in the corporate insolvency discussion, there is a lot more corporate debt out there and some of that has inevitably been supported by personal guarantees and you can see some pressure being put on those as and when businesses start to fail and personal guarantees are called in.

Abigail Hadfield:

Another area that might see, of course, a more immediate rise in activity is fixed charge receiverships. This process is not available in relation to Scottish security but certainly in England and Wales and Northern Ireland, it is a very useful enforcement option for secured lenders to businesses operated by sole traders or other unincorporated borrowers. Providing the receiver has got the requisite powers of course, this process is easy to initiate, it is within the lender's control and it can be used to enhance recoveries by selling properties as part of a going concern for example in England and Wales, rather than on a break up basis.

Alan Munro:

Do we anticipate that IVAs and protected trust deeds will become a more favourable option for debtors than bankruptcy or sequestration?

Jason Byrne:

I don't know about them becoming more options, Alan. I think generally speaking, debtors would prefer not to go bankrupt if they could avoid it and therefore, IVAs are always going to be a more attractive option if a debtor is able to offer creditors something better than bankruptcy. I think given what we have just come through, there is the expectation that going forward more individuals will unfortunately find themselves in financial difficulty more than normal, due to pandemic-related situations such as redundancies, business closures, trade and therefore perhaps, a greater proportion of the local private debtor market than usual will be taking insolvency advice and by taking that advice, an extension of that may be more debtors presenting IVA proposals to their creditors.

Jason Byrne:

I think somebody alluded to it earlier that there is the possibility that government bodies and banks might be more tolerant going forward, certainly in terms of proposals and perhaps more ready to vote in favour of a proposal where the primary cause of the financial distress is COVID-related and therefore, a more receptive creditor attitude in itself may also increase the attraction of IVAs for debtors. So I think any increase in people looking for financial advice and solutions, that will lead to maybe an increase in the popularity of IVAs over bankruptcy as opposed to simply IVAs of themselves just becoming more attractive.

Alan Munro:

Yeah, I think there is a similar story in Scotland over the last five years or so. Protected trust deeds have significantly outstripped bankruptcies as a method of choice for a debtor to get debt relief and in Scotland, there are way more voluntary insolvencies than there are compulsory which are creditor-led. I do not see that changing anytime soon, I think there is a real industry there where people who are in financial difficulty are much more likely to get advice.

Alan Munro:

It is so easy just to go onto Google and you will find any number of insolvency practitioners who are in a position to offer you a debt solution, giving you sexy offers of get rid of 90% of your debt by just clicking here. So I think there has been a shift where debtors really understand the market, understand the release that they can get and I think protected trust deeds tend to be pushed much more than a formal insolvency process and that has been reflected in the last five years and you can really see that changing.

James Forsyth:

Alan, I would agree completely with IVAs in England and Wales. They almost always offer a better outcome or a perceived better outcome than bankruptcy and I think just general higher levels of personal debt in the market are inevitably going to push forward IVAs. I think there is a more sophisticated market out there for selling them, although we have seen a few of the IVA factories entering into difficulties so it will be interesting to see whether that trend picks up again or they will be done on a little bit more of a bespoke basis perhaps. And going back to what I mentioned earlier, I think if there is generally more of a perception of wealth arising out of the increase in house prices then people may feel that they have got something to throw into the IVA pot rather than just maybe feeling that a debtors petition is the way forward and start again.

Alan Munro:

Turning to adjustable transactions or rather challengeable transactions, antecedent transactions so transfers under value, preference payments, defrauding creditors and that sort of thing, do we think from an insolvency practitioner point of view we will see more activity on that front?

Peter McGladrigan:

From Northern Ireland, yes, and I think that is going to be the answer across the patch. I think there is going to be a huge avalanche effect in terms of debtor pressure whether it would be that individuals have lost their jobs and they are putting pressure on trustees and bankruptcies to investigate potential transactions. Especially what we find locally is that often, for example a petitioning creditor can know the financial affairs of the bankrupt inside out, perhaps lives nearby them, is aware of assets that a trustee in bankruptcy may not have and that I think is going to inevitably put the pressure on insolvency practitioners to really focus investigations in terms of transactions that have taken place.

Peter McGladrigan:

Bearing in mind that a lot of our sectors that are in Northern Ireland that have been hugely affected by furlough and potentially unemployment so for example, the manufacturing sector, leisure and arts, tourism, hospitality, there is going to be a knock on effect in terms of the ability to recover debts from these businesses and perhaps decisions have been made at a time of uncertainty which later down the line could be subject to scrutiny by an insolvency practitioner. So I think there is definitely going to be a lot more pressure from debtors on insolvency practitioners to really get their teeth into cases to see if they can make the recovery.

Alan Munro:

Yeah, I mean from a Scottish perspective and as Caitriona says across the border it is going to be the same, it is evitable these types of actions are going to become more prevalent in the next few years, given the expected increase in personal insolvencies. We saw this after the credit crunch in 2008 and fully expect to see it again once personal insolvency figures begin to rise. Some debtors such as company directors will have one eye on any personal guarantees to make grants of the banks and lenders and if they anticipate that their businesses are likely to cease trading due to insolvency once furlough comes to an end or just due to the market conditions generally, they might be tempted to try and divest themselves of their assets in an attempt to keep them out of reach of their trustee and bankruptcy. Insolvency practitioners will no doubt be looking very closely at any recent alienations or transfers by debtors over the coming months and years.

James Forsyth:

For me, the trend will continue to increase as well because of the prevalence of funding in the market, I think that unlocks a lot of claims and as more and more funders come in and some of the more high-profile ones do well, I think that will always unlock a significant amount of investigation. What I would say there is, I think it will be interesting to see how behaviour post-pandemic is analysed by the courts, I think there will be a lot of empathy as to what people have been up to and they have done to try and survive over the last 15 months and it may well be that behaviour that was perhaps less tolerated or accepted prior to the pandemic, there is just a little bit more of judicial empathy out there such that there might be a few higher-profile claims which fail simply because of people playing the card of having to survive during the pandemic period.

James Forsyth:

So I think yes, there will be undoubtedly a larger amount of investigation and that will inevitably lead to a larger number of cases and I suspect most of them will be successful but I predict there will be a few high-profile ones where a gut feel is that they probably would have been successful pre-pandemic that have been viewed through a slightly different lens post-pandemic.

Alan Munro:

Now, the Breathing Space Scheme. What do we think about this and how will it sit alongside the current protections? Is there less stigma to it than bankruptcy or sequestration and is it going to be a useful alternative or is it simply delaying the inevitable?

Caitriona Morgan:

In Northern Ireland, well first of all, these provisions aren't in effect yet so again, we would be watching the other jurisdictions to see what happens there and how progress is made in terms of interpretation and how all the parties involved will react to the new regulations.

Ainslie Benzie:

In Scotland, we don't have the Breathing Space regulations either. The closest that we have in Scotland is the already well-established moratorium which Peter discussed before on diligence to assist individuals with problems. However, both sets of legislation themselves and how they apply are starkly different so one of the big differences is in relation to accrual of interest and fees which isn't impacted in Scotland but is stopped under the Breathing Space protections. And another example is unlike the Breathing Space protections in England and Wales, there is no requirement for prior debt advice to be obtained by a Scottish debtor prior to seeking the moratorium protection. And finally, in Scotland creditors aren't required to be notified nor do they have a right of appeal which is completely different to the Breathing Space regime in England and Wales so we will be watching with interest in terms of how Breathing Space is applied and seeing if there is going to be a lobby for an equivalent process in Scotland but I suspect that that won't be the case.

Abigail Hadfield:

And as you say, Alan, from England and Wales' perspective, these regulations are in force and I suppose mental health is a topic at the top of the public agenda and so the regulations that should hopefully provide important protections for people in that kind of crisis and help them to avoid more formal processes. But it will be interesting to see how much take-up there is in relation to the standard Breathing Space so for debtors who are not in a mental health crisis and whether using these regulations actually helps individuals get back on track and avoid a formal insolvency process. My view is that the period of protection is relatively short, it's 60 days and also crucially, the Breathing Space is not a payment holiday so debtors still have to meet ongoing commitments, only interests and charges are frozen as Ainslie mentioned. So that doesn't feel like much of a Breathing Space to sort out what could be quite complicated personal situations but we will wait and see.

Alan Munro:

Well, thank you again for that insightful conversation and I hope those of you watching at home or in the office found it useful. Please do get in touch if there is a particular topic you would like to hear from our insolvency team about and thanks for watching.

 

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