Credit Management November 2021 2

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INSOLVENCY DELAYED ACTION Corporate insolvencies will rise as Government support comes to an end. AUTHOR – Caroline Sumner SINCE the start of the pandemic, insolvencies have fallen. More than 4,500 fewer companies entered an insolvency process in 2020 than the year before, which is an unusual trend given the economic climate. Over the last four months, however, insolvency numbers have been increasing – with the latest figures, which covered August of this year, showing numbers that were not dissimilar to August 2019. As the economy continues to open up and the pandemic support measures wind down, we are likely to be in for an increase in the number of businesses entering a corporate insolvency process after months of declining numbers, economic turbulence, and unprecedented Government support. The full extent of this increase, however, remains to be seen. A SEISMIC ECONOMIC BLOW The first lockdown led to a 25 percent drop in GDP between April and February 2020. As restrictions eased and were then reinstated throughout the rest of the year, and early 2021, the economy recovered. In fact, the final two lockdowns resulted in much smaller economic contractions than the previous ones, and, at the time of writing, just under three months after the final restrictions were lifted, the economy is only 2.1 percent smaller than it was in February 2020. However, the continuing economic recovery doesn’t tell the full story. As a result of the pandemic, some businesses shut down – either as a result of the Government’s restrictions or of their own accord – while others had to review or revise their business models in order to continue trading. This had a knock-on effect on members of the supply chain, staff who were furloughed, while the enforced closure of schools meant that working parents were balancing their professional commitments with their parental ones. It also affected consumer spending levels, which fell year-on-year in 2020. On a more positive note, levels of household savings increased, but it remains to be seen whether those will be spent as the economy continues to reopen or whether people will hold onto the money they’ve saved. GOVERNMENT SUPPORT MEASURES The Government’s response to the economic shock of the pandemic was to pledge to do ‘whatever it takes’ to get through the crisis. This translated into a policy programme that saw hundreds of billions of pounds of support provided, changes in insolvency measures to prevent creditor action, and the introduction of initiatives to support both the employed and the self-employed. Of all its initiatives, the Government’s furlough scheme has been the most high-profile, and potentially the most impactful – protecting more than 11 million jobs at its peak, enabling businesses to retain staff they would otherwise have to have made redundant. Our one concern, though, is how businesses will navigate the post-support world, and whether all of the measures the Government has introduced will have prevented or simply paused increases in corporate insolvency. GOVERNMENT STEPS IN WITH NEW LEGISLATION The pandemic prompted the Government to introduce one of the most significant pieces of insolvency legislation for 20 years, in the form of the Corporate Insolvency and Governance Act. The Act, which came into force in June 2020, introduced two new tools for the insolvency profession to use, both of which were intended to support the process of recovering businesses. The first of these, the moratorium, was intended to give businesses breathing space to explore their options for resolving their financial issues. The second, the Restructuring Plan, enabled insolvency and restructuring professionals to restructure financially distressed companies via a flexible, court-supervised process. The Act also included three temporary measures: restrictions on using winding-up processes; temporary changes to wrongful trading rules; and relaxation of meetings and filing requirements to give companies greater flexibility. A MODIFIED APPROACH More recently, the Government announced its temporary insolvency measures were to be phased out from 1 October, and that it was introducing two new measures which would be in force until 31 March next year. The first of these was a temporary increase in the current debt threshold for a winding up petition to £10,000, while the second required landlords to seek proposals for payment from a debtor business, and introduced a 21-day pause before landlord creditors could move forward with winding up action. What’s clear about the Government’s approach to legislation postlockdown, is that it is tapering the withdrawal of support to reflect the opening up of the economy and the need to balance the interests of businesses with those of their creditors. It’s evident it wants to prevent both a rush of insolvencies and the potential knock-on effect of Advancing the credit profession / www.cicm.com / November 2021 / PAGE 10
INSOLVENCY AUTHOR – Caroline Sumner unpaid debts on members of the supply chain, which could lead to further insolvencies in the future – even if the new measures prevent a sudden increase in the run up to Christmas. DIRECTOR MISCONDUCT Another factor which could potentially affect future insolvency levels is the Government’s plans for addressing director misconduct by granting the Insolvency Service new powers to investigate directors of dissolved companies, as part of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. The proposed change to the Insolvency Service’s powers will mean that directors of dissolved companies will be put on a more equal footing with directors of insolvent companies, and that sanctions can be brought against directors who have been found to have acted dishonestly. This is positive news as it should help deter directors from using dissolutions to avoid scrutiny and liabilities. However, we have concerns around whether the Insolvency Service has the resources to carry out the additional investigations alongside its current workload. If the legislation passes, and the Service is given the additional resources to support its new powers, it should mean fewer directors will be able to misuse the dissolution process. Caroline Sumner Chief Executive of R3. There’s no doubt with the support ending, we’ll see an increase in the number of distressed businesses, but these are likely to be divided into two categories. AN INEVITABLE RISE I don’t think anyone would argue with the suggestion that the Government’s support for businesses has been crucial in preventing the economic consequences of the pandemic from leading to a serious increase in corporate insolvencies. However, with this support ending, and the Government pursuing a careful post-lockdown policy agenda that balances the needs of businesses and creditors and introducing new legislation to reduce the misuse of the dissolution process, I suspect it’s highly likely that corporate insolvencies will rise in the future. This suspicion is supported by data from the Insolvency Service, which shows more than 4,500 fewer companies entered an insolvency process in 2020 compared to 2019 and around 3,000 fewer companies entered one between January and August of this year and the same period for 2019. The Service’s figures suggest that there are several thousand firms which would have become insolvent were it not for the pandemic. However, questions remain about whether those that have survived it to date can continue to do so now the Government’s support is ending, and when the increase in insolvencies will happen. There’s no doubt with the support ending, we’ll see an increase in the number of distressed businesses, but these are likely to be divided into two categories: those who were distressed before the pandemic and those that were distressed because of the pandemic. Both of these will likely have benefitted from the Government’s support measures, but when any of these types of business enter an insolvency process will depend on the financial situation they’re in, and how quickly their directors choose to take steps to resolve it. For this reason, and along with the new temporary measures the Government has introduced, I think it's unlikely we’ll see a sustained increase in insolvencies until the Spring of 2022 at the very earliest. Some sectors will be harder hit than others, and factors other than COVID – such as haulage issues, labour force shortages, increased raw material costs and Brexit – will all have an impact on whether businesses survive the next six months. There are further measures that the Government could take to support struggling businesses: for example, HMRC adopting a flexible approach to Time to Pay arrangements would help to reduce a possible surge in insolvencies as the pressure on businesses ramps up over the next few months. Until that point, the profession will continue to advise and support those who need our expertise and remind those who may need it of the benefits of engaging sooner rather than later. Advancing the credit profession / www.cicm.com / November 2021 / PAGE 11
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