Construction industry looks to life after Covid-19 and the Corporate Insolvency and Governance Act 2020

Written on 22 Jul 2021

Does the extension of pandemic protections risk creating 'zombie' businesses in the building sector?

The government has extended measures in the Corporate Insolvency and Governance Act 2020 (CIGA) to protect businesses during the pandemic until 30 September 2021.

The CIGA came into force on 26 June 2020. It introduced new procedures and measures to rescue companies in financial distress as a result of the Covid-19 pandemic.

Pandemic protection

Although statutory demands can still be served, the restriction introduced by CIGA prevents statutory demands being used as the basis of a winding-up petition, thereby eroding the utility of the statutory demand as a tool for applying pressure on debtors.

This restriction does not prevent winding-up petitions being pursued. However, while the temporary restrictions are in place, a creditor will need to be able to demonstrate that Covid-19 has not financially affected the debtor, or that the debtor would have been unable to pay notwithstanding Covid-19, in order to succeed.

The ability to enter into the new moratorium introduced by the CIGA is intended to allow a distressed company to explore its rescue without the threat of creditor action.

New extensions

The CIGA was originally due to expire in November 2020 but was extended to March and April 2021. At the time the government stated that this would be the final extension, but due to the continued impact of the pandemic on businesses and the economy, it has extended its provisions, firstly to 30 June 2021 and now to 30 September 2021.

These extensions, in conjunction with the recent extension of the restrictions on commercial lease forfeiture until March 2022, provide real protection for a business in distress. But there is a view that the government is simply continuing to delay the inevitable – and that some of these businesses will never recover from the impact of the Covid-19 pandemic and, in effect, have become "zombie" businesses.

Zombie businesses

The concept of zombie companies arose out of the 2008 - 2009 economic crisis and is generally considered to refer to a company that would be insolvent but for protections afforded to it or the unusual circumstances in which it is operating. Following the 2008 crash and the years of market turmoil and uncertainty that ensued, many companies were unable to service their debts. This was met by government-backed, low-interest rate loans, which allowed the companies to just about survive but certainly not thrive. Coming out of the Covid-19 pandemic, it is possible that zombie companies are being propped up by the protections currently afforded to them but may struggle to stave off insolvency when those protections end.

Insolvency pressures

The Insolvency Service has highlighted that the construction industry tends to have the highest quarterly level of insolvencies of any industrial grouping and it experienced the highest level of insolvencies in the 12 months ending in the first quarter of 2021.

With the industry facing a shortage of materials and increasing costs, the economic pressures of the pandemic, coupled with any further effects of Brexit, pressure is rising on those within the construction industry operating on tight profit margins. This extension will only seek to further that pressure on those who are already struggling to extract payment from debtors.

OC comment

With the recent easing and planned removal of restrictions, it remains to be seen whether or not any of the provisions of CIGA will be extended further. In the meantime, the government and insolvency specialists are urging businesses to plan for the future and seek to make arrangements for what could be a very difficult time for both business and the economy when the protections are, eventually, lifted.

For those in the construction industry, all parties should be actively monitoring supply chains to spot potential problems and seek advice early in order to minimise risk as much as possible.