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Ready for the wave of failures


Reports suggest a incoming surge of insolvencies expected in the wake of Covid fi nancial support being rolled back


Eddie Flanagan Partner, Shakespeare Martineau


The Government’s Covid support schemes proved to be a lifeline for many – the furlough scheme, business rate holiday and VAT cuts from 20% to 5% helped many weather the storm, to a point where business life for many has returned to some form of normality. While many amassed arrears during


this time, HMRC held the hand of many businesses, helping them to reach a position of securing a steady cash fl ow as Covid restrictions came to an end. However, these lifelines were never meant


to be permanent.. The reduced 12.5% VAT rate will be bumped back up to its original 20% rate on 31 March 2022. This, on top of restrictions on winding-up petitions recently ending, is likely to push many fi rms (who have just been able to prevail fi nancially) into the red. The spectre of looming insolvencies of


struggling businesses rears its head once again. For businesses that were not able to brave


the fi nancial hit of the pandemic, assets that were subject to fi nance agreements were sold out of trust as a part of some fi rms’ illegal strategies in staying afl oat. In these cases, forbearance has resulted in losses and additional problems for the credit and lending sector.


In addition to this was the issue of multiple or prior-fi nance claims. The recent case of Arena TV has highlighted the risk of missing or multi-funded assets causing exponential losses to funders. With impending insolvencies on the


horizon, it is imperative that creditors and lenders take the appropriate steps to ensure


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their assets are easily inspected at the point of funding and, where arrears arise, funders should consider the contractual right to inspect. Visibility as to the asset is paramount in the


reduction of losses post termination. Despite this, the signs of economic recovery


raises the need for funding to replace assets that are aged or in need of replacement as society is now fully open. During the pandemic, budgets were


tightened and this provided a real fi nancial opportunity for the asset base lending space. So what can lenders do to manage the risk of asset disappearance with the prospects of increased business? Let us look at the IT and offi ce furniture


sectors as an example here. These have in many ways benefi ted from the push for homeworking, and will continue to do so in light of many employers off ering a hybrid working model. Throughout the pandemic businesses have


put schemes in place to provide assets for individuals working from home. Should a business using these assets fall into insolvency, lenders must have strategies in place to minimise the losses from their end. When these instances of insolvency or


impending insolvency occur, it is imperative that lenders have access and communication with the insolvency practitioners prior to and when they are appointed.


Personal bankruptcy or corporate insolvency? It is important for lenders to fi rst consider what type of insolvency is occurring. Is this


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personal bankruptcy? If so, consider not only the funders’ contractual rights but also the regulatory obligations under the Consumer Credit Act 1974 and the FCA handbook. One of the fi rst steps which funders can take to minimise risk is to evaluate where any agreements are FCA-regulated. Aff ordability and treating customers fairly


is key and should be taken into account when taking the steps to terminate an agreement. However, FCA regulation can impede your ability to recover assets. The conduct of funders is scrutinised


greatly by the FCA and is considered by the courts when litigating such matters.


Commercial insolvencies Now let us look at corporate insolvencies – in cases of liquidation, if the contractual conditions provide for this, the funder can trigger termination and the immediate return of the assets.


Throughout the pandemic businesses have put schemes in place to provide assets for individuals working from home. Should a business using these assets fall into insolvency, lenders must have strategies in place to minimise the losses from their end


March 2022


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