North West corporate insolvencies at lowest level in four years

Corporate insolvencies across the North West dropped to the lowest point since 2016, with 41 companies entering administration in the second quarter of 2020, according to analysis of notices in The Gazette by KPMG’s Restructuring practice.

This represents a fall of around a third from the year’s first three months.

The quarter was almost entirely a period of lockdown, with plummeting consumer spending and largely overlapping with a record GDP fall of 20.4%

Rick Harrison, turnaround and restructuring partner at KPMG’s Manchester office, said: “Clearly government measures have had a dramatic impact.

“The effect of putting parts of the private sector into a quarter of virtual hibernation has not just severed the link between a fall in economic activity and a rise in corporate insolvency – it has flipped it on its head.

“Nonetheless, the picture of distress painted by the insolvency data is markedly shaped by COVID-19.

“Looking at the national picture, administrations in healthcare have dropped by 64%, a far greater extent than other sectors.

“This fall is only exceeded by that in the technology sector, in which administrations fell by 71%.

“This, perhaps, reflects the lockdown-related growth in reliance on technology by consumers and businesses alike.

“Conversely, passenger transport, which broadly refers to coach operators, is one of the few sectors to see a rise in insolvencies, of 67%, highlighting that even the Government measures could not give sufficient headroom to some companies that were dependent on our ability to travel.”

He added: “The severity of the poor financial health of some in retail and casual dining is not reflected in these figures.

“These sectors were struggling pre-COVID-19 and what you have seen since the easing of lockdown as they emerge from hibernation is a raft of closures, CVA proposals and administrations.

“These are likely to continue and, indeed, accelerate as some of the Government support schemes wind down.”

Unfortunately a rise in financial distress and insolvency numbers should be expected in the coming quarter, said Rick, looking ahead to the challenges facing business.

“Our regional businesses are emerging into a quite different landscape.

“They may be required to navigate unforgiving territory, combining the withdrawal of government support, local lockdowns, consumer caution and shrinking margins as volumes and production efficiencies decrease.

“The months ahead will see real pressure on cash flow as a consequence of the working capital demands of reopening, whilst at the same time servicing and repaying new bank facilities, repaying tax and creditor arrears and the costs of any required restructuring.

“The need to focus on building financial resilience, and the importance of maintaining liquidity through proactive cash and working capital management cannot be overstated.

“Managing a ramp-up in business activity in such an uncertain economic environment will be one of the biggest challenges many directors have ever faced.

“Understanding the cash and timing impact of business decisions may prove critical. Knowing the levers that are available and how to prioritise them will be a key feature of robust business planning.”

He concluded: “Given this outlook, the Q3 North West insolvency data could tell quite a different story.

“However, the most significant change to insolvency legislation in nearly two decades came into effect at the end of June.

“These provisions – including a new moratorium process providing breathing space from creditor pressure and temporary changes to certain director requirements – may help some businesses find a solvent solution to their financial challenges, avoiding the need to enter administration or liquidation.

“Furthermore and notwithstanding these challenges, the market will present an opportunity to refocus businesses, adapt to new ways of working and to access new and growing markets that have evolved during this crisis.

“We are already starting to see a marked increase in value creation and accelerated acquisition opportunities that will provide an additional accelerator to growth for those with capital to deploy.”