Debt, debt recovery and coronavirus

In this section you'll find information and updates related to coronavirus that are relevant to the law on debt and debt recovery.

The UK's response to coronavirus is changing regularly and often very quickly. While we'll continue to make every effort to keep this page up to date, there may be short periods where what you read here is not the latest information available. Where possible we've tried to provide links to official sources, so you can check the current situation.

Financial support for struggling businesses

Support is available from the UK government and the devolved administrations for businesses and self-employed people. We've highlighted some of these schemes below. For a complete list, visit the main business support pages for the UK, Wales, Scotland and Northern Ireland

There is also a Coronavirus business support finder that you can use to find help that's available in your particular circumstances.

Help for tenants who can't pay rent

Temporary measures have been put in place to protect commercial and residential tenants who are unable to keep up with rent payments. See our Coronavirus (COVID-19) Property section for more on this.

Recovery Loan Scheme

The Recovery Loan Scheme is available until 30 June 2022.

The attraction of this scheme is that a borrower's main private residence can't be used as security for repayment of the loan and the borrower will not need to sign any personal guarantees for any loan amount of £250,000 or less.

Until 31 December 2021, this scheme:

• is available to businesses of all sizes;
• offers loans of between £25,000 and £10 million per business; and
• gives accredited lenders a government loan guarantee of 80%.

From 1 January 2022, this scheme:

• will only be open to small and medium sized enterprises;
• will provide a maximum amount of finance of £2 million per business; and
• gives accredited lenders a government loan guarantee of 70%.

Temporary and permanent insolvency law changes

The Corporate Insolvency and Governance Act 2020 amended insolvency law to give struggling companies breathing space and help them to keep trading while they explore rescue options.

New moratorium

The Act permanently created a free-standing moratorium intended to give companies breathing space to explore options for survival.

The directors of an eligible company can get a moratorium by filing relevant documents at court. A company with an outstanding winding-up petition would need a court order to apply for a moratorium (except in Northern Ireland, where until 30 March 2022, such companies can also simply file relevant documents at court).

There must be a statement from an insolvency practitioner (the monitor) that, in their view, it is likely that the moratorium would result in the rescue of the company as a going concern. In Northern Ireland, until 30 March 2022, the monitor can make this statement if they feel the company would've been rescued by the moratorium had it not been for the impact of coronavirus.

The initial moratorium lasts for 20 business days. The directors can extend the moratorium for a further 20 business days, provided they can – among other things – confirm that all moratorium debts have or will be met. Further extensions (up to a maximum of 1 year) require the consent of creditors. The court may also extend the moratorium. There does not appear to be a maximum extension period if the extension is granted by court order. In Northern Ireland, until 30 March 2022, the effects of coronavirus on the company can be taken into consideration when applying for an extension.

During the moratorium

• Creditors can't take enforcement action for pre-moratorium debts, i.e. debts that have fallen due before or fall due during the moratorium. However, there are some exceptions, including amounts payable for goods/services supplied during the moratorium, rent for the period of the moratorium, salaries, and debts or other liabilities involving financial services.
• No insolvency proceedings can be started against the company during the moratorium period, though the directors can still start them via the monitor.
• No creditor can enforce security or repossess goods in the company's possession, unless they get the court's permission. No proceedings or legal process can be started or continued, and a landlord can't exercise a right of forfeiture by peaceable re-entry. The moratorium prevents a floating charge from becoming a fixed charge (i.e. crystallising) and stops restrictions being imposed on the disposal of assets.
• The monitor must ensure that it's appropriate for the moratorium to stay in place, and sanction certain acts by the company. The monitor must end the moratorium in certain situations, e.g. if the company's rescue is no longer likely, or if the company can't pay its moratorium debts.

Creditor protections

There are protections for creditors (or members) of the company to apply to court for relief on the grounds that the management of the company's affairs, business and property unfairly harms their interests.

Eligibility

Companies are generally eligible, unless they:

• are a financial service company;
• are already subject to a formal insolvency proceeding;
• have already been subject to a moratorium during the 12 months prior to the filing date (unless the court orders otherwise); or
• have already been subject to a Company Voluntary Arrangement or administration during the 12 months prior to the filing date.

New restructuring plan

Under the Act, a restructuring plan can be proposed between a company and its creditors (and/or members) for the purpose of dealing with financial difficulties.

This will apply to any company liable to be wound up under the Insolvency Act 1986 that has encountered (or is likely to encounter) financial difficulties that affect its ability to carry on business as a going concern.

Any creditor or member whose rights are affected by the plan must be allowed to participate in the process and be given enough information to vote on the plan. However, those with no genuine economic interest in the company can be excluded.

The voting majority for each class is 75% in value. If passed, the plan has to be approved by the court, who will assess whether it's just and equitable. However, it's also possible for the court to sanction the plan where a class has voted against it. It can do that if:

• the members of the dissenting class would be no worse off under the plan than they would be in the event of the relevant alternative; and
• at least one class who would receive a payment (or would have a genuine economic interest in the company in the event of the relevant alternative) voted in favour.

'Relevant alternative' is whatever the court considers would be most likely to happen if the plan were not sanctioned.

Where a plan is proposed within 12 weeks of the end of the new moratorium period, it can't affect the rights of creditors in respect of either moratorium debts or pre-moratorium debts that weren't subject to the moratorium restrictions.

Restrictions on winding-up petitions

Throughout the UK, from 1 October until 31 March 2022, creditors can't present winding-up petitions in either of the following situations:

• The debt is unpaid commercial rent that's unpaid because of the financial effects of coronavirus.
• The debt is less than £10,000 in total.

In other situations, from 1 October, creditors are again free to rely on the non-payment of a statutory demand as evidence that the company can't pay its debts.

However, until 31 March, creditors must (unless they apply for an exemption) give companies a notice that asks them to make proposals for payment of the debt and give them 21 days to respond. After this, or if the company responds with proposals that aren't acceptable, the creditor can proceed with a petition – though it must contain a statement saying these requirements have been met and explaining why any repayment proposals were unacceptable.

Protection of supplies of goods and services

Contracts for the supply of goods or services will often allow suppliers to take action if the company they're supplying becomes subject to an insolvency procedure, e.g. by allowing them to end the contract. This helps the supplier to manage the risk of continuing to supply the goods/services but not getting paid.

The Act provides that certain suppliers won't be able to make use of such clauses. This applies even if the right to end the contract arises before an insolvency procedure but wasn't taken up (the right is suspended when the insolvency procedure begins).

This restriction doesn't apply where the company or supplier is involved in financial services, including insurance companies and banks.

A supplier can end the contract if:

• the company stops paying them (provided the contract allows that); or
• the company agrees; or
• a court allows it, which it can if it's satisfied that continuing the contract would cause the supplier hardship.

Bankruptcy help for debtors (Scotland)

There are changes in law that mean those with significant debts have more flexibility to apply for bankruptcy and more protection from creditors.

We've listed the main changes below but see the Accountant in Bankruptcy website for more information.

Temporary changes

The following changes apply until 31 March 2022.

Moratorium extension

A moratorium is the period during which those owed money can't take any formal action against those who owe it. The purpose is to give those in debt time to consider their options and get appropriate advice.

The moratorium starts on the date on which an individual or other eligible entity gives the Accountant in Bankruptcy (AiB) notice that they intend to apply for bankruptcy (also known as 'sequestration'). It now ends after 6 months, rather than the usual 6 weeks.

If you're thinking of making use of this, keep in mind that if a moratorium is approved, your details will be published on the public Register of Insolvencies and this will probably affect your credit score.

Creditor petitions

Creditors can only apply to court to make an individual or entity bankrupt (also known as 'sequestration') if they're owed £10,000 or more. The previous limit was £3,000.

Permanent changes

Minimal Asset Process (MAP) bankruptcies

MAP bankruptcies are designed to be a simpler process for those on lower incomes and with few assets. Previously, you couldn't make use of MAP if your debt exceeded £17,000, but that threshold has now been raised to £25,000. Any student debt you have is ignored for the purposes of calculating this total. Also, the MAP application fees have reduced from £90 to £50 and have been removed entirely if you receive certain benefit payments.

Digital signatures

All forms in the bankruptcy process (except Form 9) prescribed by the Bankruptcy (Scotland) Regulations 2016 can now be signed using an electronic signature.

Court action

Businesses can still take court action to resolve disputes during the pandemic, provided you're not a landlord taking action in response to rent arrears. It's likely claims will take longer than normal.