Fast-Track Your Commercial Awareness: Insolvency

By Mohammed Tabish Wahid


AN INTRODUCTION TO INSOLVENCY

Insolvency is a state of financial distress during which an individual or business entity fails to repay debt, arising out of poor cash management, a reduction in cash flow and/or an increase in its overall costs. An insolvent company or individual will always prefer to negotiate and execute informal provisions with creditors, before getting entangled into insolvency proceedings.

Lots of you may be aware that insolvency simply refers to a company drying up of money, incapable of fulfilling financial duties and ultimately defaulting on due debt payments. Yet, is insolvency as grim as it sounds? What do the present circumstances mean for such companies? This article aims to address all such issues, in the most concise and comprehensible manner possible.

THE IMPACT OF BREXIT

Before Brexit, the UK was subject to the EUIR (European Union Insolvency Regulations) which determined which EU court had jurisdiction to commence insolvency proceedings and which member states law would apply to those proceedings. However, since repealing the European Communities Act (ECA) on the 31st January 2020, the EUIR is no longer applicable in the UK. Instead, the “EU Exit” regulations 2019 have amended the Recast insolvency Regulations and have had a full effect since exit day. Therefore, UK insolvency proceedings no longer benefit from automatic recognition in EU member states. Upon examining, contemporary statistics regarding company insolvencies in England and Wales, it is evident that insolvency cases have escalated immensely reaching a record number of cases in the last five years. Following the latest data published by the Insolvency Service, 4,321 company insolvencies were recorded in the second quarter of 2019, a significant 12% increase from the same quarter the previous year. The Federation of Small Businesses (FSB) deems that these figures are forecasting the effect of rising uncertainty, facing small firms and the self-employed, directly showcasing the impact of Britain’s mysterious and very much unclear position following Brexit.

THE IMPACT OF COVID-19

COVID-19 has no doubt played a huge role in aggravating company insolvency during recent months. Despite the government spending billions to subsidise businesses in the form of generous grants to keep failing companies afloat, The Corporate Finance Network has recently noted that ​almost a fifth of all small businesses in the UK can potentially go bust as their cash flow is deteriorating. The adverse economic impacts of the pandemic have temporarily altered numerous areas of insolvency law. Predominantly, The Corporate Insolvency and Governance Act 2020 temporarily prohibits creditors from bringing winding-up petitions against a company on the basis that it is unable to pay its debts, where an inability to pay originates from the impact of the pandemic. Secondly, the Act states there is no obligation for companies to file insolvency, although a delay can give rise to liabilities for directors. Moreover, a temporary Insolvency Practice Direction has also been introduced, providing workable solutions for court users during the current COVID-19 pandemic, with its intention to avoid, so far as possible, the need for parties to attend court.

INTERVIEW ESSENTIALS

Explore questions on contemporary developments relating to insolvency. Consider the impact of Brexit and COVID-19 on company insolvency and link this to business uncertainty, rising costs and reasons for depreciating cash flow. Research and find examples of companies that have filed insolvency proceedings and consider the process by which companies negotiate with creditors.

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