EXTENSION TO ACT ‘AMOUNTS TO STICKING PLASTER’

Sticking Plaster

The government’s decision to extend measures in the Corporate Insolvency and Governance Act is a double edged sword which ultimately amounts to short-term sticking plaster, says insolvency specialist Steven Mason.

The provisions were designed to stave off a deluge of company failures during the pandemic.

Steven, a senior corporate insolvency manager at forensic accounting and insolvency practice Inquesta, said: “Treasury officials have been frantically looking at ways to cushion the economic blow of a second lockdown, and some people will say that the extension to the provisions of the Act will provide a vital breathing space for distressed businesses which are in trouble through no fault of their own.

“They will now have the chance to survive and ‘come again’ in 2021. It may well also help save many good companies as a result.

“However, on closer inspection, the move is a cause for concern.

“Extending the ban on statutory demands as the basis for winding-up petitions until at least the end of 2020 will give a stay of execution for zombie businesses which, armed with bounce back loans, furlough monies and tax deferrals, live to fight another day.

“Yet these companies, which could number tens of thousands, have no long-term future and are merely clinging on by their fingertips. They may well have taken out loans to fund their short-term survival, with no realistic means of repayment.

“That means they will cause exposure for other companies and, in the case of the bounce back loans, the taxpayer will pick up the tab for any defaults.

“It is also likely that these companies will incur further credit, continue to evade their creditors and cause a bottleneck in the system which cannot last indefinitely.

“Many good and vibrant businesses will still be prevented from applying the necessary legal remedies to chase monies owed to them. For them, extending the Act’s provisions is a ‘Get Out of Jail’ card for debtors who will continue to avoid paying their bills.

“Without the threat of a statutory demand, bad companies have a licence to act wantonly in the knowledge that nothing can be done to them.”

Steven added: “In most cases, it looks like the government’s latest measure will provide only short-term sticking plaster which merely delays the inevitable.

“As the government is increasingly aware, a perfect storm is brewing which could see an unhappy ending for many businesses at the start of 2021.”

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