The UK may soon see a wave of corporate insolvencies once the ban on winding up petitions comes to an end in July, business groups have warned the government.
Many companies have been struggling to repay their debts in recent months but have largely been protected from creditor action by the ban on winding up petitions that was introduced as part of the government’s response to the Covid-19 crisis.
Representatives of the Institute of Directors (IoD) and the insolvency industry’s main trade body R3 have written to the government expressing the view that many British businesses could soon be facing collapse.
According to the Financial Times, the letter warns of a “cliff edge” facing businesses if the ban on winding up petitions is lifted at the end of June as is currently set to happen.
The main concern for the IoD and R3 is that thousands of businesses across the country will suddenly come under much more intense creditor pressure than they’ve been facing during the pandemic.
Those pressures could well lead to a situation in which corporate insolvency rates increase very sharply and for a sustained period, which would clearly be bad news for the businesses themselves but also for their employees and, potentially, the wider UK economy.
Given that HMRC will feature prominently as a creditor once companies are again faced with winding up petitions, the IoD and R3 want HMRC to help give businesses in debt a fair chance to rescue their positions and not be forced into administration or liquidation.
Part of the case being made by the business groups is that HMRC is ultimately likely to bring in more money to the Treasury if it can lean towards taking a more constructive approach to pursuing debts from companies in financial trouble.
“The ability of companies to negotiate with their creditors will depend on the HMRC’s position - if the HMRC demands its cash back immediately then other creditors are less likely to agree to terms to keep the business going,” said Roger Barker, head of policy at the IoD.
“HMRC have placed themselves at the top of the pecking order - and with that position comes responsibility given decisions will have a ripple effect across jobs and other related suppliers and customers,” he added.
For its part, the government has said in a statement: “HMRC only pursues insolvency action as a last resort after considering all alternative routes to recovery of a debt, and of all insolvency proceedings that go ahead, only around 10 per cent of them are petitioned by HMRC.”