Skip to content

Fred Chandler | 25th March 2021

CIGA and the lockdown rollercoaster


Fred Chandler | 25th March 2021

CIGA and the lockdown rollercoaster

As legal prohibitions on creditor action and other temporary measures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) start to be relaxed, our Corporate Restructuring & Insolvency team reflect upon a year under lockdown and assess where we are now, and what the coming months hold.

STOP PRESS: Since the introduction of The Corporate Insolvency and Governance Act 2020 (CIGA) in June 2020 and the date this blog was written, there have been multiple amendments and extensions to the temporary provisions intended to take account of the continuing unprecedented financial climate caused by the Coronavirus pandemic. We highlight the key updates as follows:

  • ‘Suspension’ of wrongful trading liability retrospectively for the period 1 March 2020 to 30 September 2020 under CIGA 2020. Reintroduced by CIGA (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 for the period 26 November to 30 April, and subsequently extended by the CIGA (Coronavirus) (Extension of the Relevant Period) Regulations 2021 and expired on 30 June 2021.
  • Restriction on the use of creditors’ winding up petitions and statutory demands retrospectively for the period 1 March 2020 to 30 September 2020 under CIGA 2020. This period has been extended on four subsequent occasions to 31 December 2020, 31 March 2021, 30 June 2021 and 30 September 2021. For the period 1 October 2021 to 31 March 2022, winding up petitions can be granted for COVID-19 related debts (but not for outstanding commercial rents where the reason for non-payment was as a result of COVID-19), provided that the petition debt is £10,000 or more and that creditors have sought proposals from the debtor allowing 21 days for a response before petitioning.
  • Restrictions on rent-related forfeiture of business tenancies retrospectively for the period 26 March 2020 to 30 June 2020, extended on four subsequent occasions to 31 December 2020, 31 March 2021, 30 June 2021 and is now due to expire on 25 March 2022, and the period in which commercial rent arrears recovery action (CRAR) is restricted has been extended for a further nine months to 25 March 2022.

CIGA & the first lockdown

It is March 2021, a month which marks the uncomfortable anniversary of what in many ways – including its effect on corporate insolvency – has been the single most disruptive event of modern times. At 1pm on Thursday 26 March 2020, the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 came into force, formally requiring (amongst other things) that business premises in England and Wales – many of which had, by this time, already been effectively deserted – close. Two days later, we published our first blog under lockdown, subtitled simply “week 1 ”, just as the Business Secretary announced that the government would soon be putting forward sweeping new legislation designed to create a corporate breathing space on commercial debts, and to suspend the operation of the wrongful trading provisions in the Insolvency Act 1986. This would later become CIGA.

Whilst the courts had actually started applying aspects of its restrictions even before it was formally enacted, CIGA itself did not come into force until midnight on 25 June 2020. By this time, we were on Amendment No.4 to the Restrictions Regulations, non-essential retailers were able to reopen following lockdown 1 and face masks had been made mandatory on public transport. Since then, we have been back on and off the lockdown rollercoaster, experiencing two more national lockdowns (the latter of which we are still officially in at the time of writing, albeit the government is now taking steps to ease us back to “normality”, whatever that may now entail). We therefore approach the anniversary with a mixture of hope and trepidation, given that most of us thought the pandemic would only interrupt our lives for weeks rather than months, and some of us have not set foot in our offices for over a year.

So, what has all this meant for the corporate insolvency world? What are we now seeing more of, and what are we yet to see? As we offer our answers to these questions, we shall attempt to bust common myths and set out some key considerations for directors of limited companies and LLPs along the way.

What are we seeing now?

Based on our recent experiences, we are starting to see more claims being investigated and/or brought against directors by liquidators and, in parallel with this, more directors expressing concerns about their business as they contend with issues such as faltering supply chains related to Brexit and/or COVID issues, disruption in terms of their workforce and business premises, and continued uncertainty in terms of the restoration of creditor powers just as government support for business starts to wind down. We have also noted an increase in the number of directors ‘willing’ to put their personal assets on the line, with a rise in requests for advice on personal guarantees in order to secure new loans, other investment and sometimes simply the continuation of existing credit facilities.

Our message, as we explore further below, is that business owners need to keep wise to these fast-moving changes and be both objective and realistic about their business’ future prospects before jumping head first into their next major business decision. Whilst budgets may be strained, taking appropriate advice sooner rather than later has never been so important as it is now.

What are we yet to see?

We are yet to see what the mainstream media too often refer to as ‘a wave of corporate bankruptcies’. This is essentially for two reasons:

  • Busting the myth of “corporate bankruptcies”

Firstly, this is because the phrases ‘corporate bankruptcy’ and ‘limited company bankruptcy’ – which we understand are now particularly common terms in British-based internet searches – simply have no meaning at all in English law. These terms have slipped into everyday use and BBC headlines from other jurisdictions – quite possibly from us all watching too many American TV dramas! No doubt our Family law colleagues can relate, albeit in reference to the common misnomer of the “common law spouse”, but it is important to be clear what we mean because these things have serious legal consequences.

What we actually mean when we say ‘corporate bankruptcies’ in the UK is corporate insolvencies, typically formal liquidations, administrations and CVAs (company voluntary arrangements), although insolvent companies are frequently restructured to avoid such a process, in effect restoring them to solvency, whether by reducing their debts, enhancing their assets or a combination of both. In our jurisdiction, the term ‘bankruptcy’ refers only to a formal option for private individuals needing relief from debts they cannot pay or negotiate and/or creditors wishing to realise any assets those individuals do have through a process of sale and division. A company cannot therefore become bankrupt, but it is insolvent where it is unable to pay its debts as they fall due, or when the total value of its current and future liabilities exceeds the total value of its assets. So, in the ongoing fight against legal misunderstandings, consider this another myth busted! More often than not, we see terms within the context of insolvency being misconstrued. If the above titbit has piqued your interest, we have previously blogged about various other misconceptions and busted more myths about insolvency terms.

  • Suspension of legal remedies

The second reason as to why we think we are yet to see a wave of corporate insolvencies (our emphasis added, of course) is due to the continued legal suspension of various remedies which a company’s creditor would normally be permitted to pursue. We blogged on the initial extension to the Corporate Insolvency and Governance Act 2020  late last year but since then, some of the temporary measures introduced by CIGA have been extended once again and are now due to end on 31 March 2021. Ultimately, this has meant that creditors have not had access to key enforcement options, namely the serving upon company debtors of statutory demands and winding up petitions. Prohibitions have been in effect since 1 March 2020 and 27 April 2020 respectively, and whilst it has not been completely impossible to wind up a company during that time, a creditor would have needed to prove that the debtor company’s inability to pay these debts was not due to COVID-19 – a very difficult task indeed.

Statistics courtesy of insolvency trade body R3’s recent update on monthly corporate and individual insolvency statistics, illustrate the major effect this has had on corporate insolvencies which have fallen 49% between February 2020 and February 2021. Many had predicted, not unreasonably, that the pandemic would have led to a large number of business failures driving the insolvency numbers up rather than down, but the prolonged policy of government ‘support’ (for want of a better word) has effectively stemmed the tide, until now. We expect this particular myth to become a reality in the coming months, however, as kicking the can down the road and taking on additional debt will not be enough to sustain every business through to a meaningful recovery, it is an unavoidable fact that many SMEs are particularly vulnerable at this point. As government support slowly begins to fizzle out and directors of businesses – now strapped for cash – have to start thinking very carefully about their next moves, it is inevitable that a number of businesses will not make it to those greener pastures, as the Chancellor himself seemed to accept when he acknowledged a likely significant rise in unemployment over the coming months.

Where are we now?

With the 31 March 2021 finishing line for the prohibition on certain creditor actions now looming, we predict that from April, creditors will be looking at the prospect of serving the first statutory demands in relation to liabilities that have arisen during the pandemic. Consequently, we may see a number of demands being served on corporate debtors next month and beyond, with the potential of winding up petitions to follow. If that is right, this danger should serve as a catalyst for directors and LLP members to seek (or as the case may be to update any existing) advice from an insolvency practitioner accountant as to their options for avoiding formal insolvency and/or taking control of a formal process for themselves, so as to mitigate any potential shortfall to creditors and/or personal liabilities which might accrue to them as officers.

We cannot, of course, rule out the possibility that the government will take a leaf out of its own book (for example in respect of the furlough scheme) and announce a last-minute, staggered, approach (notwithstanding their statement that the last extension was a “final” one) to ensure the prospective tidal wave is more of a constant drip. They might do this, for example, by opening enforcement action up in the first instance only to institutions such as HMRC.

As HMRC have already intimated that they will not be taking action until September 2021 at the earliest, they might be able to act as a slow release brake, setting the tone for other major creditors and enabling companies to take advice and explore all remaining funding options. At the time of writing, the position remains uncertain and with just under two weeks until the deadline, clarification from the government would be very much welcomed at this stage. Whether they make an eleventh hour announcement or not, however, we know that these sorts of measures cannot continue indefinitely, and whether creditor action is restored in April or in October, all companies in debt now, or which expect to need to go into debt in order to trade through, will face a cash reckoning at some point in the near future.

What should directors be wary of?

In our experience, it is the constant worry of a company director, particularly a director of a smaller company, that anything they might be doing now, or about to do tomorrow, will land them with one or more personal liabilities in the future. This worry is both real and understandable, but provided we are wary of where the risks are likely to come from, it is possible to navigate these difficult waters without incident.

Much has been written in this context about the current suspension on the accrual of individual liabilities arising from “wrongful trading”, which suspension is expected to expire on 30 April 2021. Much like the suspension on creditor action, it is not known whether the government will seek to extend this measure again or not, although in this case an extension would not be significant in terms of the risk a director runs in trading their business anyway.

The suspension was only ever a headline designed to give the impression that the continuation of a company’s trading during the pandemic did not pose an undue risk to directors in terms of personal liability. The truth is that the risk was unchanged, because a director could still in principle be found to have engaged in wrongful trading, and could still be directly liable for acting in breach of any number of separate duties to the company, particularly if they allowed the company to trade whilst it was insolvent (sometimes referred to as insolvent trading, although again that phrase has no definition in English law). The change of law in 2020 did nothing to alter any of these duties, and wrongful trading was only ever a very rare action for a liquidator to pursue before the pandemic, so nothing was achieved here to insulate directors against liability.

The issue with the suspension on creditor action and tinkering with the law on wrongful trading is that they can offer a false sense of security and act as a disincentive for directors to address the issues of their businesses to either open a dialogue with creditors to restructure their business and/or its funding, or to explore formal insolvency options.

In terms of companies avoiding future insolvency by securing access to credit, there have been reports that High Street banks have already reached their budgets for lending this year and, with government support set to slowly fade as the year progresses, directors may find later down the line that they no longer have access to the overdraft or factoring facilities that they would usually expect. This may lead to directors exploring loans with less familiar lenders who often tend to charge higher interest rates which the business is therefore less likely to be able to afford to repay. Add to this the likelihood of a greater number of personal guarantees being requested to support such loans and/or the possibility that there may already be a deficit on the relevant directors’ loan account, and the director’s overall personal liability risk only heads in one direction.

It is the decisions that directors are taking now that will be heavily scrutinised later if the business does not survive and remains or becomes insolvent later in the year or early next. A real-world example is that we are hearing over the airwaves of a number of directors who are accessing the government’s bounce-back loans (and other support mechanisms) and using them to pay for day-to-day expenses without any clear visibility of how these will be paid back.

It is essential for directors to look at the viability of their business and make realistic projections before they decide to take out another loan (whether or not the loan is government backed) or make decisions on the likelihood that funding will be available later, whilst keeping clear records of their decision-making processes – something which we highlighted in our tips for directors blog. In the same vein, directors must ensure that any dividends are declared and paid out properly with reference to the profits of the business and shareholder resolutions. As always, directors need to keep in my mind their duties to the company and, where the company is or might become insolvent, to the company’s creditors, as detailed in our diretors’ duties blog.

For directors who find that their company cannot realistically avoid a formal insolvency procedure, there may well be a temptation to try to offload the relevant debts which could not be managed by, for example, putting the company into administration or liquidation and reacquiring its business by buying it back from the office holders, but through a new company with the same management. This is sometimes referred to as phoenixing, phoenix trading or phoenixism, and – if it is planned carefully and executed with proper precision – it can be a particularly effective way of preserving the underlying business. Whilst the concept is often controversial, there is nothing inherently wrong with it provided every step is taken to recognise and protect the interests of creditors. Done badly, however, in a case involving a formal liquidation as some part of the process, it carries great risk for any director involved with the new company as well as anyone acting under their direction, not just in terms of personal liability but also in terms of potential criminal prosecution. For all these reasons, we recommend that directors wishing to avail themselves of the legal protections which allow them to trade a new company in such circumstances take independent legal advice as to the management of their personal liability risk, in conjunction with taking advice for the company from an insolvency practitioner accountant.

In extreme cases involving serial phoenixism (more than two failed companies involving HMRC as a significant creditor), a director could be found to be directly liable to HMRC under a joint liability notice (JLN), making them jointly and severally liable for any outstanding tax liability owed by any or all of the companies involved and having recourse only to the First Tier Tax Tribunal if they wish to appeal.

Summary and advice

We have come a very long way in the past year, and we shall shortly all be emerging from the hibernation of successive lockdowns not only with a new sense of purpose and perspective, but also with a new set of tools. Insolvency practitioner accountants now have an impressive array of legal mechanisms for helping businesses to navigate the challenges of the coming months, and there is reason for optimism that good businesses will survive, if perhaps in a somewhat different mode or shape to before the pandemic. Struggling businesses, too, will have options for dealing with their problem debt and the potential exposures of their owners and managers. The options for all businesses, however will be at their most extensive if that advice is sought at the earliest opportunity and whilst creditors are still receptive to dialogue, rather than waiting for one or more demands to arrive.

As we have reinforced above, directors need to be realistic in respect of their business’ viability and future projections. Many businesses will be strapped for cash as a result of the pandemic so they may see the latest offerings of government backed loans introduced by the recent budget as a helpful aid, but the question to be asked is: can they clearly justify how the business will repay these loans? Businesses should not be pursuing loans in order to replace one debt for another on similar terms – the viability of the business is of paramount importance. If directors are in any doubt, they should seek professional advice; we are now likely to start seeing insolvency practitioner advice (which does not have to wait until the company is already insolvent) as an essential next step for certain businesses, rather than just a sensible option to consider.

We are able to advise and assist you in relation to any insolvency-related legal issues you may have, including matching your needs to an appropriate insolvency practitioner accountant. Please do not hesitate to get in touch with any member of our Corporate Restructuring & Insolvency team who would be delighted to help.


Stay up to date with our latest industry news

By completing your details and submitting, you are consenting to us sending you relevant legal updates and invitations based on the areas of interest you select. For further details please read our privacy notice.