PERSONAL INSOLVENCY: An Introduction

PERSONAL INSOLVENCY: An Introduction 

A turbulent time for debtors 

The combined effects of COVID-19 and Brexit have had a significant impact on the economy and business over the last 24 months, with premises being unable to open, supply chain issues and wholesale change needed in the way many businesses operate.

The leisure, hospitality and retail sectors have been particularly hard hit, with problems including social distancing and other restrictions causing capacity issues even outside of lockdowns, difficulties with the availability of staff and reduced footfall and consumer confidence. Whilst government interventions have given some businesses a lifeline, arguably this has only postponed the inevitable for many, especially as this help falls away.

This will all have a knock-on effect on personal insolvency. Whilst businesses had some protection from enforcement of unpaid debts (such as the bar on the service of statutory demands and presentation of winding up petitions), no such protections were in place for individuals. Individuals who have given personal guarantees in respect of company liabilities will find them called upon if the company is unable to pay.

Further personal liabilities can now be imposed on individuals in connection with their companies. The government is now cracking down on the abuse of Bounce Back Loans (BBLs) made during the height of the pandemic. As part of this, legislation introduced on 15 December 2021 ensures that directors of companies, including those which received BBLs – this being one of the motivators of the legislation – can no longer avoid liability by dissolving the company, as the Insolvency Service (IS) now has the power to apply to court for such directors to be disqualified. An order requiring the director to pay compensation to creditors who have suffered due to their misconduct may also be sought.

Away from COVID-19, and since 22 July 2020, the Finance Act 2020 has made it possible for HMRC to serve a notice, in certain circumstances, transferring a company’s outstanding tax liabilities to its directors (including shadow directors), in cases involving tax avoidance, tax evasion, or phoenixism. This is just one example of the growing influence of HMRC in the insolvency sphere, another being the reintroduction of (secondary) preferential status for certain debts to HMRC, since 1 December 2020.

Insolvency statistics 

At present, it is unclear that the increasing levels of corporate insolvency is translating to higher formal insolvency figures for individuals. There were 630 new bankruptcies in November 2021, 33% less than in November 2020, and 54% less than in November 2019. Debt Relief Orders (DROs) were up 44% in November 2021 as against November 2020, but 13% lower than November 2019, before the pandemic hit (DROs have increased since July 2021, however, due to a change in the eligibility criteria; mentioned below). IVAs remained at a similar level to the previous two years. The fall in bankruptcies may be partly due to a more lenient approach from creditors during the pandemic, or as their resources were diverted elsewhere (or limited due to the impact of the virus).

Whilst the rising numbers of corporate insolvencies may not yet be having a knock-on effect to individual insolvency statistics, many are facing financial hardship, and with the removal of government support and temporary restrictions on creditor actions, and further challenges on the horizon, things are likely to get worse.

Help for debtors 

Whilst more individuals may be becoming vulnerable to financial pressures, however, the range of options available to assist debtors is increasing.

In May 2021, the IS announced new measures to help vulnerable people in problem debt, by increasing the number of people eligible for DROs. New monetary eligibility limits for DROs, which are aimed at individuals with comparatively low levels of debt, came into force on 29 June 2021. The total debt allowable for a DRO, for example, is now £30,000, rather than £20,000. As a result, the IS anticipated “that over 13,000 more people may use DROs in the next 12 months compared to 2019, an increase of nearly 50 per cent”.

The changes to DROs were intentionally implemented at the end of the first 60 days of the government’s Debt Respite (Breathing Space) scheme (the Debt Respite Scheme), which came into force on 4 May 2021. The Debt Respite Scheme introduced two types of breathing space – standard and mental health crisis – to individuals fulfilling certain criteria, providing protection from creditors. The standard breathing space prevents creditors from taking enforcement action and fees and interest from accruing, in respect of eligible indebted individuals, for 60 days, with additional protections for those receiving mental health crisis treatment. The government predicted the scheme “will help over 700,000 people across the UK get professional help in its first year, increasing up to 1.2 million a year by the tenth year of operation. Between the launch of the Breathing Space scheme on 4 May 2021, and 30 November 2021, there were 36,931 registrations, comprised of 36,411 Standard breathing space registrations and 520 Mental Health breathing space registrations.” 

Final thoughts 

The number of formal insolvencies fell in the pandemic compared with pre-pandemic levels; however, with government financial support having ended and temporary restrictions having either fallen away or with a limited remaining lifespan, it is likely that financial hardships will continue and insolvency numbers will rise. Individuals who have guaranteed the debts of companies in distress, and company directors, in particular, will need to continue to give careful consideration to their obligations, to avoid potential pitfalls. Early planning and seeking professional advice, where appropriate, will be critical.

Contributors:

Kevin Mitchell

Nicholas Oliver

Frank Brumby

Craig Parrett

Sarah Phillips