Debt recovery, insolvency and evictions — what now for temporary restrictions?
Scotland moved beyond level 0 this week.
Amongst other things, this means the legal requirement for physical distancing and limits on gatherings were removed from 9 August when all venues across Scotland were able to re-open.
As we edge closer to something resembling pre-COVID normality, what does that mean for the temporary measures introduced last year to give businesses and tenants breathing space in the middle of a global pandemic?
Insolvency and debt recovery
One of the main provisions in the Corporate Insolvency & Governance Act 2020 relates to statutory demands and winding up petitions.
At the moment, creditors will be restricted when it comes to using statutory demands and winding up petitions until at least the end of September this year unless they can show those debts are unrelated to the pandemic.
This exception has been largely untested, but unless the debt is historic, it will likely be difficult for a creditor to demonstrate that the failure to pay was not in some way pandemic-related.
Moratorium on diligence
Demand for this protection from creditor debt enforcement appears to have increased. The Accountant in Bankruptcy (AIB) Scottish statutory debt solutions statistics show there were 756 moratoria applications granted between April to June (Q1) in 2021, almost four times the 190 figure in the same quarter the year before.
Corporate insolvencies increased too from 99 in April to June 2020 to 163 in the same period this year.
The extension to the moratorium period from six weeks to six months will be extended to 31 March 2022. There’s also a provision to lengthen that further to September 2022. However, from 30 September this year, debtors can’t benefit from more than one moratorium on diligence in a 12-month period.
Bear in mind though that a moratorium doesn’t stop a creditor raising court action, they just won’t be able to enforce the decree or judgement while it’s in place.
Minimum debt level
The minimum £10,000 level for creditor petitions for sequestrations (up from £3,000) will now be extended to 31 March, 2022. It had been due to expire at the end of next month. Again, there’s the provision to extend it to 30 September, 2022, although there is speculation this might become a permanent change.
In contrast, the small business exemption prohibiting the use of a termination clause in contracts for the supply of goods and services, and the suspension of personal liability for wrongful trading were not extended. They expired on 30 June this year.
The increased minimum debt level will limit the options available to creditors with debts in excess of £3,000 but under £10,000. Previously the threat of sequestration was sometimes enough to prompt payment, but creditors will now be entirely reliant on arrestment, attachment and inhibition as a means of enforcement. Often these don’t have quite the sting of sequestration.
The extension of the period of notice for eviction for a commercial tenant to 14 weeks for monetary breaches of a lease (for example non-payment of rent, insurance, or service charges) will end on 30 September.
It will then revert back to 14 days.
When it comes to residential properties, the extensions to the notice periods will now run to 31 March, 2022, with the provision to extend until 30 September that year. All grounds of eviction will remain discretionary during that time and landlords must continue to make reasonable efforts to agree a repayment plan with tenants before seeking an eviction order on the basis of unpaid rent.
This could well be good news for commercial landlords, but even if they are considering evicting a tenant, they’ll still need to weigh up the benefit of doing that against the liabilities that will become their responsibility when a property’s vacant, such as business rates.
Of course, if new tenants are waiting in the wings, or can be found quickly, then this reduced period will be welcome. At the moment the commercial property market is competitive with supply outstripping demand, but that might well change in the coming months if business confidence starts to be restored following the end of most restrictions.
Residential property landlords, on the other hand, may find it frustrating that the notice periods for their properties are still significantly longer than pre-COVID days.
It’s important to remember too that these landlords haven’t been immune to the impact of the pandemic, and many won’t have a large portfolio, instead will perhaps just rent out a second property and rely on the income to fund that mortgage and maintenance costs.
So all in all an area with a number of moving parts to watch as restrictions ease further.