Insolvency law change could add to COVID debt fears
An imminent change to insolvency law and a predicted increase in COVID-19-related business failures could significantly impact the cost and availability of credit insurance, the specialist cover specifically designed to protect against bad debt.
That’s the warning from RBIG Corporate Risk Services who point out that the December 1, return of ‘Crown Preference’ will push lenders and suppliers down the debt payment queue.
The Manchester commercial insurance brokers advises that the revised law will mean HMRC will step ahead of certain lenders and unsecured creditors to gather specific taxes which have been collected on its behalf. These include PAYE, VAT and employees’ NI contributions.
The move comes as the Office for National Statistics reported that in September, 64% of all UK businesses were at risk of insolvency. Analysis by corporate recovery specialist Begbies Traynor also found that some 557,000 businesses are now in significant financial distress.
RBIG commercial director, Stephen Hodgson, said: “The timing of this legislative change couldn’t be worse given widespread predictions that the insolvency rate will rise as the pandemic continues to bite, with England set for lockdown and restrictions already in place across Northern Ireland, Scotland and Wales.”
He points out that the measure is likely to curb the availability of floating charge finance, a lending tool favoured in business restructuring and rescue packages: “By turning that tap off, the Finance Act 2020 could well further increase the number of insolvencies.
“A single insolvency can cause a significant chain reaction down a supply chain, impacting not only otherwise financially healthy companies who dealt with the defunct business, but their suppliers.”
There could be a further knock on effect as trade credit insurers could look to limit their risk exposure by restricting capacity and increasing premiums, he warned.
