Top Legal firm warns of Insolvency tsunami

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A Top 100 Law firm has warned of a possible tidal wave of insolvencies in Spring 2021 which risks paralysing the UK’s courts system.

Manchester based JMW Solicitor’s analysis shows that corporate insolvencies are down circa 42%, year-on-year up to October 2020, whilst Creditor Voluntary Liquidations, are down 36% There is a decrease of 76% for Compulsory Liquidations and a decrease of 35% for Administrations.

Simultaneously, the ONS estimated up to 63% of businesses are at risk of insolvency, raising fears of a hidden crisis that will boil over once government support ends in Q2 2021.

In June, the government introduced temporary reforms to insolvency laws as part of its measures to support businesses through the economic crisis. The changes saw restrictions imposed on the ability to present or pursue winding-up petitions and restrictions on landlord enforcement for unpaid rent.

The law on wrongful trading was also modified in favour of directors between June and October. This was recently, and unexpectedly, reintroduced on 26 November and expected to run through to 30th April 2021.

James Williams, a Partner at JMW Solicitors, said “We have seen a pattern of steadily rising insolvencies year on year in the UK, so a 42% reduction amidst the worst economic and societal crisis in 100 years is very concerning.’

“The measures the government introduced to prevent businesses from being forced into formal insolvency procedures were a necessary blunt instrument in a time of crisis. However, in 2021 lots of the business which would have progressed naturally into an insolvency in 2020 will still retain the underlying issues they had, and most will be have a worsened balance sheet as a result of COVID-19.”

“As a result, corporate insolvencies in 2021 will comprise of 2020’s unmaterialised insolvencies, 2021’s natural insolvencies (still trending upwards from 2019), insolvencies brought on by COVID-19 (whether by taking on too much debt or lack of trade) and, potentially, insolvencies resulting from Brexit – some of which appear inevitable even with a deal.”

“With so much creditor pressure built up in the system, careful thought must be given to lifting the current restrictions on winding up petitions to prevent the Courts being overwhelmed.”

“Landlords have been restricted from re-entry for unpaid rent and, also, along with everyone else, put off petitioning for winding up due to the current restrictions. Once the government reverses the COVID protections we can expect to see a surge in creditor action to present petitions and a surge in landlord enforcement action. It’s hard to see how the government can lift the restrictions without this surge materialising. There appears to be no plan for how the measures will be lifted without causing this surge. It seems sensible that the measures should be lifted in a phased withdrawal, but any such phasing should be published early to allow creditors and debtors to plan accordingly.”

“Without a measured lifting of the temporary rules currently in place, it will spell unnecessary disaster for thousands of businesses come springtime and risks the Courts being paralysed under the weight of new winding-up petitions.”

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