As the full effects of the Coronavirus pandemic began to be felt last March many anticipated a significant rise in formal insolvency appointments as companies grappled with the difficulties of a loss of revenue and a need to meet fixed costs.
The insolvency and restructuring industry braced itself for an increase in work not seen since the financial crisis in 2008. However, thanks in no small part to the Government support measures put in place, this increase has not yet materialised. In fact, 2020 saw the lowest number of insolvency appointments since 1989 and industry predictions of increased volumes have been repeatedly pushed back as the pandemic and corresponding support measures continued. To coin a phrase, it seems fair to say the Government has succeeded in ‘flattening the curve’ of financial distress.
Yet as the country continues to reopen and support measures are withdrawn it appears a spike may be just around the corner. The final elements of furlough are scheduled to be withdrawn on September 30th. The following day the ban on winding up petitions is lifted (subject to a minimum debt threshold of £10,000 and excluding commercial rent arrears) allowing creditors to pursue for payment via the courts in a much more aggressive manner. In addition, as repayments fall due on Bounce Back Loans and CBILS many struggling companies may began to find themselves squeezed by a number of factors.
The high proportion of zombie companies in the UK, those that do not record a profit or contribute meaningfully to the economy, has been widely reported to have increased during the pandemic. A report by the thinktank Onward in April 2021 estimated as many as 20% of companies meet this classification, an increase from 16% prior to the pandemic. Data taken from Company Watch shows that the position in Lancashire is stark as an estimated 10,211 companies are believed to be zombie companies. The figure in 2020 was 6,715 and the current level represents a 52% year on year increase in zombie companies. These companies may struggle to recover from this position once support measures and protection are withdrawn and a cliff edge looms large for a number of companies on October 1st.
Corporate failure isn’t however a certain consequence to these difficulties and companies in financial distress may still be able to resolve their position by taking early advice from an insolvency practitioner. Much will depend on the stance taken by HMRC and other creditors and how pragmatically they approach overdue debts. There will be a range of options available for distressed companies, but the main considerations will be the need to keep a tighter than ever rein on cashflow controls and to assess the likely market in their specific industries. If future trade is anticipated to be positive this may enable companies to reach appropriate plans to deal with their historic debt and recover from their zombie status.
As directors if you are facing financial difficulties as support measures are withdrawn it is important to take early advice from a licensed insolvency practitioner whilst restructuring options are available. A consultation can be arranged with Ian McCulloch at Opus Restructuring & Insolvency by calling 07854 031177 or e-mailing [email protected]