Bringing business back to reality post-Covid

Covid-19 restrictions saw the UK Government issue a number of provisions for firms that needed additional support. Besides having access to generous loans, companies were also able to put a pause on debt repayments. As the provisions wind down, fraudulent businesses are exploited and some businesses face the harsh reality of being back on their own

In the words of UK accountancy firm Crowe, “one of the strangest aspects of the Covid-19 pandemic has been the low number of corporate insolvencies over the last 18 months”. Begbies Traynor’s latest ‘red flag’ research supports this perplexity, suggesting that “the number of businesses in significant financial distress has fallen 14% since Q2 2021”. You may be thinking, “how can this be?”. Generally, when businesses experience a large economic decline, such as the pandemic, you tend to see a corresponding effect in the number of companies going out of business, as evident following the financial crash of 2008. Yet “to a certain extent, the Pandemic has distorted these figures,” says Julie Palmer, partner at Begbies Traynor.

With over 30 years of experience in the profession, focusing on non-insolvency turnaround as well as dealing with formal appointments, Palmer is considered a veteran in the insolvency industry. The practitioner, alternatively, suggests, “the pandemic created a bit of a false number.” She adds: “Support measures were rolled out, which meant that a lot of companies didn’t need to be proactive.” Linkedin substantiates Palmer’s claim, suggesting that the government made changes to the insolvency sector to ensure businesses were kept afloat, more precisely, by guaranteeing that distressed businesses had the flexibility to either restructure or wind down their operations.

So what provisions did the UK Government inaugurate? One such move was the issuing of The Corporate Insolvency and Governance Act 2020 last June, providing protection for those companies undergoing financial distress. The new measures reportedly gave businesses “breathing space” from creditors by: prohibiting termination clauses entering an insolvency procedure; preventing suppliers from ceasing their supply or asking for additional payments; and allowing creditors to be bound by the new restructuring plan even if they do not agree to it. Essentially, creditors “couldn’t take any action against businesses,” says Palmer.

As well as the installation of these measures, the Government also gave “immediate” support to businesses throughout the pandemic by providing Bounce Back Loans (BBLS), enabling smaller businesses to access finance more quickly during the pandemic. “These loans have certainly helped keep an enormous amount of business alive over the last 18 months,” says Palmer, who highlights the importance of these temporary loans. She adds: “The beauty of BBLs is that they got there very quickly. Businesses could have up to 50k in their account within 24 days.” According to the AAT, 860,000 loans were approved within the first six weeks of launch, yet it correspondingly announced that a “number” of companies had not invested the loan into the firm, and alternatively deployed it elsewhere.

“We are seeing cases where directors have taken the money out for personal purposes, or set-up dormant companies to claim extra BBLs,” says Palmer. Indeed, the National Audit Office suggests that in March 2021, an estimated 11% of BBLs worth £4.9b were fraudulent, however it stresses the figures are “highly uncertain”. The Insolvency Service exploits businesses that have engaged in fraudulent activity. It most recently saw the banning of three directors following investigations which found that nearly £100k worth of BBLs had been “inappropriately applied for”, or “misused”, with one of the directors paying over £4k to an ex-girlfriend.

According to Palmer, there is a bit of a “mixed picture” on the BBLS. Not only did a number of companies participate in fraudulent activities, but some business owners “thought it was a grant rather than a loan,” she says, identifying a secondary issue that a number of businesses are now facing; the repayment of the loan. However, according to Palmer, it is more likely that businesses who haven’t used the money correctly will have the “real difficulties”, suggesting that it is mostly fraudulent companies that will suffer. Yet fraudulent or not, she notes that debt doesn’t discriminate and businesses may not now be able to escape their creditors so easily.

Since the Government came to an agreement to end provisions on 1 October 2021, EY UK has identified 20,559 County Court Judgments (CCJs) filed against businesses for more than £93.5m of claims between July and November 2021, and Begbies suggest that during Q3 2021 alone, CCJ’s increased by 139%. As courts had previously ceased to operate under the legislation, creditors were unable to take action against firms, however “now courts are back open for business, creditors are able to start chasing those debts,” says Palmer, and they are reportedly doing so “quite aggressively”.

According to an October report by Begbies, corporate debt increased by £1.9tn to £6.6tn last year, with 52% of UK businesses now ridden with “toxic debt” that may “never be repaid”. The data also revealed that some sectors are in a more vulnerable position than others with 66% of hotels and accommodation “unlikely” to be able to pay their current liabilities. “The London market has really suffered from the inbound tourists,” says Palmer. She adds: “The combination of a downturn in inbound tourism and business being conducted in a very different way has led to a softening in that sector”. Palmer also credits the decline in this sector due to an absence of overseas workers and ultimately suggests the industry is struggling to recruit staff.

As well as paused debt and fraudulent usage of BBLs, businesses now face the effects of the rise in inflation, or as Palmer describes, “the silent thief of the economy”. She says that real inflation is “running probably 15% instead of 5%”, and estimates that these inflationary pressures are “really going to start affecting businesses”. Indeed, according to Forbes, we are now seeing the largest inflation increase since November 1990 with inflation sitting at just over 5%, yet UBS estimate that this will rise to over 7% in Q1 2022.

Why is inflation suddenly surging? “The additional 40% of money printed during the pandemic takes about 18 months to impact on inflation,” says Palmer, and according to UBS, adverse winter weather could deplete commodity inventories and keep prices elevated. Labour markets may not recover in the way we would ordinarily expect, and it may take longer for pandemic-related issues to resolve. “I think it’s going to be an incredibly difficult balancing act going forward,” urges Palmer.

New research from BDO goes as far to suggest that as businesses look long-term, higher levels of inflation are set to “impede growth”. It revealed more than a quarter (26%) of firms see rising inflation as the issue that will have the “biggest impact” on their business in the next year; almost a third (32%) of businesses plan to cut the number of products or services they offer as a direct result of inflation, with 31% likely to increase their prices; and almost two fifths (39%) of manufacturing companies plan to ‘decrease’ the number of products on offer and a similar number set to increase prices. “It is just going to be a growing and growing issue,” says Palmer.

It needs to be said that businesses are currently suffering a combination of blows from the past 18 months. Whilst the launch of the temporary 2020 Government Act supported firms experiencing financial distress in a time of need, at least those who abided by the legislation, those who did not (11%) are seemingly beginning to face the consequences of their decisions. Yet for the entirety of businesses, with creditors becoming more aggressive, CCJs are starting to surge (139%) and Palmer warns that “we will see a fairly dramatic increase in insolvencies”.

The effect CCJs have on businesses can be destructive, however. Palmer says that customers may feel “nervous” about the prospect of working with that business and will aim to reduce that risk wholly by choosing a firm that either has no record of a CCJ, or even those showing signs of financial distress, rather than businesses that have a CCJ on their record. The increase in insolvencies will also “start to see more zombie businesses failing,” says Palmer. Zombie businesses are those that have been “artificially” kept alive since the financial crash of 2008 and have done so through low interest rates. With interest rates expected to rise alongside inflation, it is ‘unlikely’ these firms will survive. “Covid-19 and Brexit are almost yesterday’s issues but I think inflation is probably tomorrow’s issue,” notes Palmer.

With the current position businesses find themselves in, Palmer concludes it will be hard for them to adjust to the “new normal”. She likens the situation to firefighting, suggesting businesses will spend “every bit of their day firefighting the problems of the business, rather than actually trading the business”, adding that firms could be in financial deterioration for a lengthy period. However, if businesses are able to speak to an adviser “as quickly as possible” they may be able to lessen the financial distress they find themselves in. “The sooner firms take that advice, the more businesses can help,” concludes Palmer. It may be that firms who act quickly can be granted a “second chance” to deal with the position of those liabilities, suggesting business’ realities may not be so harsh after all.

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