Reform is welcome, but with insolvencies soaring landlords’ concerns must be considered

September’s insolvency statistics revealed a 14% drop in the number of insolvencies compared with August. However, businesses are still facing the fundamental challenge of high interest rates and reduced disposable income and, tellingly, there was a 17% increase in the number of insolvencies compared with September 2022. With further economic challenges on the horizon, last month’s decrease in insolvencies should be recognised for what it is: a slight drop, not a sea change.

Insolvency reform is likely to remain front-of-mind for many across the property and built environment industries as a result. This year has already seen 2,883 construction companies become insolvent according to the most recent figures. The retail sector, meanwhile, has seen 1,425 insolvencies this year including Wilko, one of the largest retail insolvencies in recent times. This adds real urgency to the question of whether the government’s ‘major shake-up’ to the insolvency regime is a rash move or a sensible step forwards.

The UK’s insolvency regime, widely considered a world-leading example, exists to protect the interests of creditors. Insolvency practitioners are officers of the court, with clear objectives laid out in legislation. Those objectives include finding solutions where creditors, employees and stakeholders are protected. Unfortunately, the reality of insolvency is that some parties won’t always be paid everything that they’re owed. Unsurprisingly, these disappointed parties often seek someone to blame. As it is often landlords who are the party that loses out, their scepticism of the current insolvency framework and desire for reform is understandable.

The courts will, where possible, support plans that enable businesses to continue trading, considering that to be a greater good. Where the alternative is a shutdown, CVAs and restructuring plans can allow businesses to trade on successfully, ultimately to the benefit of all. But given the discontent with the current system, the property sector will surely welcome the introduction of a requirement that all firms and individuals be regulated. A public register for insolvency practitioners including those that are subject to sanctions is also a step in the right direction.

Regulation is crucially important because one practitioner’s misconduct undermines confidence in the profession as a whole. As a result, anything that ensures the regulators are fair, efficient and appropriately empowered can only be a good thing. The decision not to create a single regulator, however, will be a disappointment to commercial property professionals if the overwhelming support the proposal had received from members of the British Property Federation is anything to go by.

The current position, in which regulation is split across four bodies, appears to be unsatisfactory for landlords. Many are concerned about potentially inconsistent regulation or, more troublingly, that regulators could adopt a lenient approach to sanctions to keep their members on side and fight off competition. The cost in time and money in bringing complaints against regulators is also a concern.

The recent proposals, in which the four professional bodies oversee the profession and work with the Minister for Enterprise, Markets and Small Business, are light on detail as to how the promised transformational improvements and increased public confidence will be delivered. There is a logic to questioning how the insolvency regime can be transformed whilst it appears the status quo is being maintained. The government has promised to keep the idea of a single regulator under review, but no timeframe has been put on this. The property industry was enthusiastic in its support for the idea, but may now be concerned the proposal will be forgotten about.

However, it is also important not to overreact to individual cases where standards have fallen short by introducing sweeping changes. Arguably, holding tight on the decision of whether to introduce a single regulator or not, and monitoring how the economic landscape unfolds, is the right decision for now.

With interest rates remaining stubbornly high, and disposable incomes down, it is clear that firms are still operating in a highly challenging economic climate. Despite the dip in insolvencies last month compared to the previous month, overall insolvencies are expected to keep on climbing by comparison with last year. As insolvency reforms are yet to be implemented, the uncertainty for landlords shows no sign of going away any time soon.

Linton Bloomberg is an insolvency partner at law firm Reed Smith and Katherine Campbell is head of real estate disputes at Reed Smith