CM May 2020

INSOLVENCY SPECIAL
Action Stations
Insolvency predictions are vastly exaggerated,
but swift action is needed.
AUTHOR – Gareth Harris
WHILST a spike in
corporate insolvencies
as great or
greater than the levels
last seen in 2008
is almost inevitable,
the current numbers of 800,000 being
mooted represent a major exaggeration.
There will be an initial flurry of
insolvencies, as was seen in 2008, for those
businesses who were struggling before
the current health crisis emerged, or who
had limited resources to fall back on.
However, for many others the opportunity
to mothball, defer payments and seek
government support will at the very least
delay any decision to permanently shut,
and allow the directors to consider every
option available to them over an extended
period.
The recently announced and farreaching
measures by the Chancellor of
the Exchequer, including the extension of
the Business Interruption Loan Support
(CBILS) and a Covid Corporate Financing
Facility are of course welcome. However,
they will not in their own right achieve
the Prime Minister’s stated ambition
of no company facing insolvency as a
result of the Coronavirus, nor will a large
segment of UK businesses even qualify
for this support.
LAUDABLE MEASURES
Whilst these unprecedented government
measures are laudable, the reality
remains that in the short term they
will not prevent the insolvency of some
companies as they do not directly inject
cash quickly enough. And, in the longer
term, they may only act as an avoidance
or delaying measure, unless other
restructuring options are pursued.
Analyses from the two most recent
significant recessions (1990-91 and 2008-
09), illustrate some notable and consistent
trends which will help to understand
what the future landscape might look like
for businesses.
Company insolvencies during and
after the 1990’s recession peaked on the
way out of what was a shallower, less
protracted recession, indicating that
companies may have either held on for
a period and then overtraded on the way
out of the recession and so eventually ran
out of cash.
The 2008 recession was a much steeper
dive and consequently a much earlier and
larger spike in insolvencies took place.
Back then there was less government
support available compared to the
current measures set out by the Treasury.
Then we see another much smaller spike
later as the economy picked up again
– indicating an environment in which
businesses overtraded again or could not
hold on any longer as the government
support was withdrawn i.e. as HMRC
Time to Pay arrangements ran out.
Looking at our historic data and
assuming the UK heads into recession,
Holding Pattern
Breathing space or a licence for insolvent trading?
AUTHOR – David Kerr FCICM
AS one commentator put it a couple
of weeks ago (Patrick Hosking,
The Times), “It’s possible to
envisage a contagion of invoicepaying
paralysis spreading
across the business world”, as a
consequence of companies deferring payments
to creditors in the current unprecedented postcoronavirus
circumstances. That is not to say that
the government’s valiant efforts to save businesses
from going under during the crisis are unwelcome,
but merely that for creditors there is greater need
for a watchful eye on developments.
The government has announced that, alongside
furlough and all the other support, it will introduce
a number of specific emergency measures ‘as soon
as possible’ to enable the insolvency regime to
better support businesses during the pandemic.
(Parliament is returning as we go to press, and
legislation is reportedly imminent.)
EMERGENCY MEASURES
Firstly, we expect to see a moratorium period for
distressed businesses – to provide time (a ‘breathing
space’) for them to consider a rescue plan. This
are likely to be based on proposals that were
published some four years ago, have been subject
to consultation, but not yet enacted; it would give
companies protection from recovery action by
creditors (originally this would have been for a
limited initial period with an extension dependent
upon a majority creditor vote. Protections such as
the appointment of an Insolvency Practitioner as
monitor were part of the proposals and should be
retained. Secondly, there is an intention to introduce
a new restructuring framework which will be able
to bind creditors to a reorganisation plan, details of
which are yet to emerge, though again likely to be
based on previously published proposals.
If the idea of a statutory breathing space and debt
restructuring/repayment plan sound familiar, that
could be because they have been touted recently
(pre-crisis, with an intended 2021 implementation)
as new procedures for insolvent individuals.
However, although there have been employment
measures and extra help on evictions and through
universal credit etc, we have not seen parallel
announcements about special insolvency measures
The temporary
stay that the
new measures
will bring about
may help some
businesses
through the
crises, but when
we emerge from
it, they will still
have their debts
to pay.
Advancing the credit profession / www.cicm.com / May 2020 / PAGE 12