April 20, 2021

Volume XI, Number 110

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April 19, 2021

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Changes in 2021 for the UK Restructuring and Insolvency Market – Part 2

Following on from part 1 of our predictions for 2021 for the UK restructuring market part 2 looks at CVAs, directors duties and HMRC and insolvencies.

We had hoped to cover off everything in 2 parts, but 2021 looks to be a busy year so we will publish the final part of this series next week.

Company Voluntary Arrangements – the continued evolution of the CVA

CVAs dominated the headlines in 2019 and 2020 and will likely continue to do so in 2021, particularly in the retail and hospitality industry which have been hit hard as a consequence of COVID-19.

With many CVAs seeking to restructure lease portfolios we have seen the nature and structure of CVAs evolve to address criticism and questions of fairness raised by landlords.  Changes have included up-side sharing mechanisms, such as profit and equity shares as well as a move away from provisions that seek to interfere with a landlord’s proprietary rights.

We expect the New Look and Regis CVA challenge applications to be heard in March 2021, and depending on the outcome of those, the shape of a CVA may well evolve further to address any findings of unfair prejudice and reduce the chance of a landlord challenge.

As an example of how CVAs have evolved, we have seen recent CVAs introduce COVID rent clauses, enabling a company to further reduce rents if (because of Government restrictions) it is required to close some or all of its premises.  This new mechanism has (as far as we are aware) not (yet) been challenged by a landlord but it does demonstrate the flexibility of the CVA as a restructuring tool which has and will continue to evolve in 2021.

Watch this space for further updates!

Breathing space for individuals

From a personal insolvency perspective from 4 May 2021, individuals will be able to apply to obtain “breathing space” from creditors in certain circumstances.  For individuals this will assist with debt pressures, for IPs this could delay recoveries into an estate – our previous blog gives more details.

HMRC and insolvencies

Preferential Status

HMRC will play a pivotal role in how businesses bounce back (or not) in 2021, depending on how it responds when restrictions on winding up petitions are lifted, deferred tax payments become due and its response to requests for a time to pay agreement.

To date, we have not really seen whether HMRC’s reinstatement as a preferential creditor (from 1 December 2020) will influence its response when dealing with distressed business.  Will it be less supportive knowing that a large percentage of crown debt will be paid ahead of floating charge and unsecured debt if the company enters an insolvency process?  Will we see an influx of HMRC petitions?  Hopefully not, as to do so would undermine the support given by the Government to businesses to date, but we will have to wait and see.  If HMRC don’t respond in a supportive manner, 2021 could be a bumper year for both tax recoveries and insolvencies.

In addition the elevation of HMRC back to a preferential status may also present challenges for directors in managing their directors’ duties. Boards will need to be wary that decisions they take may come under more scrutiny from HMRC if when hindsight is applied HMRC feel they are worse off by the way the directors have exercised their discretion. Directors may fear they could be damned if they do and damned if they don’t!

The Loan charge

There may be further changes to how HMRC deal with the loan charge depending on how the Government respond to recommendations made in a letter from the House of Lords Economic Affairs Finance Bill Sub-Committee last month.

Recommendations included amending the definition of “reasonable disclosure”, extending the time available for taxpayers to elect to spread payments and reforming the process for refunding voluntary restitution and extending the time to claim.

See our previous blog where we considered how changes to the loan charge last year impacted directors and claims against directors in the context of insolvency.

Joint and several liability

This is still a relatively new tool in the HMRC arsenal – see our alert for more details about the wide scope and ramifications – but HMRC have yet to come out all guns blazing.  This may be something we see more of in 2021, and if we do we expect there to be similar tensions between HMRC’s ability to pursue directors personally and office holder claims against directors.  Who benefits from recoveries? HMRC, the insolvent estate or both?

Directors’ Duties

Wrongful trading and insolvency risks

The suspension of wrongful trading provisions is currently due to expire on 30 April 2021.  However this (and other temporary measures – see Part 1 of our blog) may well be extended.

The government has laid regulations which extend the Henry VIII Powers in the Corporate Recovery and Governance Act 2020 (CIGA) to make temporary amendments (read here) but as yet it is unclear which temporary measure may be extended. Even if the wrongful trading provisions are further suspended – this should not be taken as carte blanch by directors to act in any manner they see fit.  There are still governance and insolvency risks that need to be considered (see our directors’ duties guide here).

Other duties  

Directors should also be mindful of:

  • Proposals to make directors — rather than boards — personally responsible for the accuracy of company financial statements. There is a White Paper expected on this shortly.

  • Expected legislation introducing new rules to report environmental and social obligations.

In the final part of this series we will look at what 2021 might hold for pensions and insolvency, cross border insolvencies and regulation.

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© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 56
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About this Author

Professional Support Lawyer

Rachael Markham is the professional support lawyer providing national and global support to the Restructuring & Insolvency team.

Rachael is responsible for precedents and know-how, organising and presenting internal and external training, responding to bespoke research enquiries, drafting and editing the restructuring and insolvency blog, producing articles for journals, providing support for BD projects, marketing and pitches, and producing a weekly bulletin on technical and practical issues that affect the Restructuring & Insolvency team.

Rachael is a member of the...

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