Richard Thomas, Head of Insolvency and Business Recovery discusses the current business climate and reviews the predictions for businesses.
The doom-mongers are really coming to the fore at the moment. Predictions of a “tsunami” of corporate insolvencies and a dam of zombie companies breaking, are being bandied about. There is clearly a basis for concern about how companies will fare as the various Government support mechanisms are withdrawn and monetary support needs to be repaid. Corporate insolvencies have reduced 20% year on year to March 2021, which seems counter-intuitive in a severe recession where the economy has shrunk by nearly 10%.
However, the various mechanisms implemented by the Government have had an undeniable influence on those figures. Apart from the direct support of furlough, reduced rates, accessible loans and the like, some of the measures which give rise to the formal insolvency figures have been effectively withdrawn from use, so statutory demands and winding up petitions were suspended and are now much more difficult to pursue than before the pandemic. That is reflected in a more detailed analysis of the figures since voluntary liquidations (where the company itself decides to go into liquidation) have only reduced by 3% whereas compulsory liquidations (the court process restricted by the Government) have reduced by 84%.
The theory, obviously, is that when the protective measures are removed a whole host of companies will simply fall over as they need that protection, otherwise they cannot survive. Can it be that simple though? There are a number of different protective measures and they are being dealt with in different ways and at different speeds.
In relation to the pandemic loans these will of course become repayable but with the Government backing of them are we going to see all the banks taking immediate enforcement action as soon as the first repayment is missed by a company? Are trade creditors suddenly going to be taking greater recovery steps than they had been? Presumably, if they have continued supplying businesses to this point it is because they are now getting paid something and if that continues, are they going to take a business down and cut off that income stream because of the historic debt when they may be struggling themselves?
The forecasts are for a 27% increase in corporate insolvencies in the UK, which isn’t far off a simple adjustment to allow for the 20% reduction there has been. The economy though, is forecast to increase by 5.9% so someone must be generating that growth.
It is noticeable that a number of the negative articles are from organisations who will benefit from businesses taking professional advice from them. However, the situation is far more complex than: we’re all going to hell in a handcart! It is though absolutely right that seeking professional advice at the very earliest opportunity will afford a business greater prospects of surviving difficult times and all businesses should continue to carefully monitor their financial performance and maintain their cash flow projections to identify early warnings and act upon them. There will be casualties undoubtedly, but will it really be as bad as the doom-mongers are portraying?
British business has always shown great resilience and a get on and do it attitude and that may confound the most negative predictions. Of course, only time will tell but why not approach the coming months with a positive attitude and cheer on businesses to be part of that 5.9% growth rather than predict they will be part of the 27% increase in insolvencies?