Why the fall in corporate insolvencies must not lead to complacency

By Phil Deyes from Leonard Curtis Leeds

If I had received a £1 over the last 12 months for every person that has said to me that insolvency practitioners must be rushed off their feet, I would have had a tidy sum saved up by now!

In fact, the number of insolvencies in England and Wales are down considerably. In Q1 2021, there were a total of 2,384 company insolvencies, including 2,047 creditors’ voluntary liquidations (CVLs), 108 compulsory liquidations, 192 administrations, 37 company voluntary arrangements (CVAs) and no receiverships.

The total company insolvencies in Q1 2021 decreased by 22 per cent from Q4 2020 and a 38 per cent decrease from the same quarter in the previous year.

This pattern has been consistent throughout the pandemic. Insolvency numbers have been suppressed. There is usually a lag between an economic crash and ensuing insolvencies, but this lag is much longer than first predicted.

So, have the government’s protection and funding measures been the best economic and business protection plan since the inception of the Insolvency Act in 1986? Or, have we a tsunami of insolvencies about to unfold as these protection measures are lifted along with funding options withdrawn, as we move towards the economy re-opening?

The general opinion amongst the restructuring community is that they expect to get busier in Q3 and Q4 of this year. We are finding it difficult to predict whether it will be a massive flood or a series of waves of insolvency over several years.

We do believe numbers will rise, if only to deal with the backlog of businesses grossly insolvent pre-pandemic, but shielded from failure by the business support and funding measures available.

How will companies fair post lock-down?

Many businesses have borrowed heavily to fund losses and have also relied upon creditor forbearance to survive. But debt needs to be repaid and the acquiescence of creditors cannot go on forever. The landlord, the bank, the leasing and HP companies, and the tax man will all want a slice of a business’s cashflow. On top of this is maintaining ongoing payments for new supplies and materials as many businesses stock up to re-open for trading. This leaves little left for investment, growth and expansion, salary rises and dividends. For some businesses, these cash pressures will be too great, and insolvency may be inevitable. But for a great many, good and effective cash management and early creditor negotiation and dialogue will prevent an insolvency.

No Time for Complacency

Some businesses are telling us that they plan to review their overall creditor position, in detail, once furlough draws to a close, anticipating problems then. Others have said that they still have cash left from their CBILs or BBLs to be able to ‘juggle things for a bit longer’, and many have noticed that the tax office is not chasing for arrears (just yet) and believe they can secure a repayment plan over several years once they do get in contact.

For some businesses, banks are deferring the repayment of CBILs which is helping, and in other situations landlords are working with tenants to repay arrears over the remainder of their leases.

Others are saying their primary concerns are managing return to work policies; making their work environment safe for staff and clients; gearing up to restart trading and making profits; generally looking forward and not over their shoulder at the burgeoning debt mountain!

We appreciate there is only so much ‘bandwidth’ available when tackling a crisis. So, we would recommend taking early advice from a restructuring professional, or other trusted advisor to help manage those legacy debts before they start to manage your business by getting out of control.

So act now.

With the extension of the Corporate Insolvency & Governance (CIG) Act until 30th June, business owners have an opportunity to plan for a more prosperous future by managing their debts more effectively.

To find out more about how we could support your business contact us on leonardcurtis.co.uk/locations/leeds/