CM May 2020

INSOLVENCY SPECIAL
AUTHOR – Gareth Harris
then we predict that the downward curve
will be much steeper than the 1990’s and
could be even steeper than in 2008, with a
consequent double spike in insolvencies,
now, and in say six to 12 months’ time.
The Covid-19 crisis has caused
economies across the globe to adopt selfdistancing
as the de-facto international
global public health policy to mitigate
the spread of the disease. Unfortunately,
that policy requires putting national
economies on hold to save lives. Unlike in
2008 when companies continued to trade,
albeit with limited means, this time the
taps have effectively been turned off, for
most. This has likely ushered in the end
of the current business cycle.
There will therefore almost inevitably
be a double spike in insolvencies
as a result, despite the government
intervention. The major banks face an
unenviable balance between lending
responsibly (arguably conservatively)
and protecting their own futures, versus
facing criticism for a lack of support. One
thing is certain, the last thing we need
now is another banking crisis.
Predictions of 800,000 insolvencies
seems a major exaggeration given that
over the course of the 2008-13 period, the
total corporate insolvencies were less than
114,000. We are likely to see the impact
first in London and the South where the
effect of CV-19 has been felt the hardest.
Sector wise, we are already seeing it in
hospitality, travel and retail – where there
several notable insolvencies have already
been announced including Cath Kidston,
Carluccio’s and Debenhams.
For those companies who may be on
the cusp of survival, it is vital that they
Recession Comparison
Graph: horizonal axis represents a 5.5-year period (22 quarters).
act now and really take swift and often
drastic measures wherever possible and
effectively go into survival mode. They
may still need some form of restructuring
process on the way out of the recession
but survive to trade another day.
Gareth Harris is a partner of RSM
Restructuring Advisory
AUTHOR – David Kerr FCICM
for individuals. Why not an acceleration
of the introduction of planned breathing
space (moratorium) proposals, so that
those who are unfortunately made
redundant (and there will still be many,
notwithstanding furlough) can pause
to take advice without the threat of
bankruptcy? We have seen (just before
going to press!) welcome forbearance
for those already in Individual Voluntary
Arrangements, providing opportunity
for payment breaks, reductions in
contributions, and greater IP discretion
when dealing with defaults.
Returning to corporate
announcements, there are yet further
measures to ensure that businesses
becoming insolvent in, and as a
consequence of, the crisis can continue
to access essential supplies to keep
operating. Keep a close eye on the
definition of ‘essential’ as those suppliers
could be prevented from terminating
contracts solely on insolvency grounds.
We are going to see a temporary
suspension of wrongful trading rules for
three months so that company directors
can trade on and keep their businesses
going without the threat of personal
liability. The legislation is expected to
cover the period from March. This has
been done in other countries during
the crisis, but it does come with a bit
of a warning to credit managers. That
threat of personal liability has helped
to focus directors’ minds when faced
with a financial crunch – advisors would
always caution directors against carrying
on trading beyond the point when they
recognise that liquidation is likely. Putting
liquidation off, and making the situation
worse, has hitherto risked their personal
wealth – removing the limited liability
they ordinarily enjoy. But with this threat
lifted, how can you be sure now that the
company you are supplying is solvent and
will be able to pay?
Worth noting though that the
theoretical risk of liability under
fraudulent trading laws remains in place,
as does the risk of director disqualification,
subject to any ‘forbearance’ that the
Business Department may adopt in its
approach to such matters, in accordance
with that which it has been advocating for
IPs in the conduct of their work.
INSOLVENCY VOLUMES
One near certainty in these uncertain
times is an increase in the number of
insolvencies, way beyond anything
predicted before coronavirus. The above
measures may mitigate against this to
some extent, but plenty of businesses
are going under. Some of those may have
been teetering on the verge of insolvency
already (for example in retail), but
unfortunately many otherwise solvent
companies will be ruined irredeemably.
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, and may have increased
their liabilities. Any return to ‘normal’
(whatever that may look like) could be
gradual, and the deferral of debts in some
cases may just be a postponement of the
inevitable.
David Kerr FCICM is an insolvency
practitioner with extensive regulatory
experience and a member of the CICM
Technical Committee.
Advancing the credit profession / www.cicm.com / May 2020 / PAGE 13