Overcoming the insolvency crisis

We are currently seeing firms across all sectors endure financial difficulties. Not only is the ceasing of government provisions just taking effect, new external pressures are also impeding businesses. As it nears make-or-break for these firms, what advice can be given to help secure their best possible outcomes?

At the end of 2021, we were beginning to witness the incline in corporate insolvencies after the support of Government-backed loans were wound-down and the ability to pause debt repayments ceased. County Court Judgments (CCJs) against businesses increased by 139% in Q3 2021 and corporate debt increased by £1.9tn to £6.6tn in 2020, with 52% of UK businesses incurring “toxic debt” that they said they “may never” be able to repay.A warning was issued by Julie Palmer, partner at Begbies Traynor, that the number of insolvencies is to “dramatically increase” in 2022 – and it seems she stands correct.

February’s registered company insolvency statistics show more than double the number the same month in the previous year. Currently sitting at 1,515, the figure is also 13% higher than the number registered in 2020 (1,346) “and it will take a while before anything resembling normality returns”, according to insolvency and restructuring trade body R3.

“Sadly, the ending of the peak of the pandemic and the lifting of the final set of restrictions hasn’t led to the shot in the arm the business community had hoped for,” says Christina Fitzgerald, vice president of the trade body. Yet the rise in insolvencies was always “inevitable” stresses insurance firm Allianz, since the provisioning of state support measures led to the number of bankruptcies reaching a “historically” low level – UK accountancy firm Crowe touched on this perplexity at the end of 2021, describing the low number of corporate insolvencies reported as “one of the strangest aspects of Covid-19,” since firm’s were expected to struggle. Similarly to Allianz, Palmer said these figures were “distorted” due to the padding of provisions during the pandemic, and in actuality it created a bit of a “false number” – it is only now that we are now seeing the consequences of this aid coming to an end.

“There is a pent up demand if you like,” says Chris Herron, co-founder of insolvency and business recovery experts, Herron Fisher. “People haven’t necessarily had to or been able to address their problems in the last couple of years, there’s been a lot of help available and perhaps not much going on. So all the firms that would have run into trouble in the last two years, have been able to park their problems.”

Herron is a partner at Herron Fisher and a member of R3’s Smaller Practices Group Committee. Over a number of years Herron has worked through recessions and witnessed changes in the insolvency landscape, operating both for the government and privately. With 37 years dedicated to the profession, he is considered to have a wealth of experience in the sector. The partner advances that “the problems haven’t gone away” for businesses, they were merely put on hold – “a perfect storm feeding an increase.” 

Additionally, consumer spending has “declined” and consumer confidence is “low” as people worry about the economy and their own financial position,” says Fitzgerald. Data site Trading Economics reports the GfK Consumer Confidence indicator in the UK fell to its lowest level in 16 months at -31 in March 2022, amid “brewing” concerns about ‘surging inflation’, ‘higher interest rates’ and the ‘Ukraine conflict’. It is unlikely these figures will improve any time soon given the impact the war in Ukraine is predicted to have on energy costs – and this is not the only cost set to worsen the insolvency crisis. 

The rise in national insurance (NI) is increasing the cost of employing people but the employees are not actually getting any of that money “in their fists,” says Herron. Although the chancellor increased the employment allowance to mitigate the effects of the NI incline, “without further immediate support, we risk undermining these crucial businesses and people and communities behind them,” warns Jonathan Andrew, CEO of Bibby Financial services. He urges the Government now needs to “heed” the concerns of SMEs across the country and “quickly.” Wider tax cuts need to be considered and energy grants employed to help SMEs overcome challenges associated with rising inflationary pressures. Yet what advice can be given to accountants whose responsibility it is to help struggling businesses in the meantime?

“The main alternatives are an IVA or a DMP,” offers Herron. An Individual Voluntary Agreement involves setting an agreed term of repayment with an insolvency practitioner, usually over a short-period of time, whereas a Debt Management Plan requires businesses to repay what they owe in its entirety without unaffordable debt being written off; for relatively high levels of debt, DMPs tend to be more expensive than IVAs. “It’s horses for courses really. An IVA is a more powerful procedure but it is a big deal.” Whereas a DMP is “sort of pushing the problem into the long grass” unless the business is going to improve in a couple of years.

A more simple yet effective way to reduce the threat of insolvency is for firms to adopt “good relationships” with their creditors. By maintaining an open and honest connection with suppliers, banks and other creditors, they may be more likely to understand the company’s predicament should it begin to experience financial strains, according to accounting firm Begbies Traynor. It is this relation that can make a difference when a firm needs extra funding, or an extended timeframe to pay supplier bills. Their support is “crucial” when trying to barter the way out of financial difficulty, “as they may be less inclined to start legal action.” Accounting firm Price Bailey strengthens Begbies suggestion, displaying that in the fourth quarter of 2020, £779k of unpaid debt was written off each day. 

“Investing in these long-lasting and positive connections with your stakeholders can foster improved productivity and growth for many companies,” said Matt Howard, insolvency and recovery partner at Price Bailey. They need to be “nurtured” as they are an important investment in the success of a business. However the success of a business does not necessarily depend on its size.

Sometimes small businesses are a” little bit more lean and mean” and they can survive better, says Herron. “But sometimes they are just so small that they have no reserves, they have no money in the bank, and they don’t have a load of capital to sell that would solve the immediate cash problem” – leading to the third piece of advice; keep close control over cash flow. “It doesn’t matter how much profit your company makes, if there is no cash the business will fold,” Begbies disclose. So what does this look like in practice? Instantly issue an invoice after completing the work/fulfilling an order; construct an appropriate payment collection method to bring money in “quickly”; use cash flow forecasting to predict the company’s cash needs over a lengthy period; and be aware of the “dangers of overtrading.” 

“Maybe people who’ve been trading for a very long time will have more reserves, but maybe not,” queries Herron. Revising the firm’s costs may also need to transpire since reducing overheads to free extra capital can aid a businesses reserves – even if this reduction is a small amount – reductions over a range of cost centres can make a “significant difference.” 

Begbies cites this can be achieved by one of three ways: cutting some of the costs of employment by limiting overtime hours; identifying and reducing any non-essential costs; and if overheads are already low, aim for a very small reduction over a wide range – but “sometimes bankruptcy is the right thing as well,” states Heron. 

“Bankruptcy was created a long time ago as a relief for people to get out of a situation – sometimes that’s the right thing to do.” Yet regardless of what firm’s are advised to do, Herron contends “we are going to be in a difficult position for a long time.” There will be firms that are able to weather the storm but some will be “too financially damaged” to recover. 

We are seeing firms across all sectors endure the financial pressures that were predicted at the end of 2021. Not only are debtors now hot on the heels of businesses indebted to them, these same firms are experiencing the additional squeeze of external contentions such as NI increase, VAT incline and the strain on the economy rooted from the ongoing war in Ukraine. 

Recent figures from the Office for National Statistics display more than 250,000 firms currently fear imminent collapse, with many firms of the belief that the government needs to “do more” to provision for most vulnerable firms. However if businesses are able to retrieve extra capital, set-up manageable debt repayment plans and build strong relationships with their partners, then they may yet be able to survive.

“I know the corporate insolvency numbers are up, but they’re only up to what they were back in 2019,” says Herron. This must also mean there are a lot of firms in the pipeline, either waiting to be sorted out, or maybe they are going to survive – “maybe with some expert help these firms will recover.” 

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