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• 02 Nov

  Covid Related Insolvencies

  

  An interesting piece in Business Money, from R3 (the insolvency industry body), who comment on the reduction in Q3 2020 insolvencies. Apparently the numbers were lower than in Q2 2020, despite the coronavirus pandemic. On the face of it you might think that is good news, but it may mask some concerning underlying issues.

  Covid Related Insolvencies

  Many would have expected Covid related insolvencies to cause the number of corporate insolvencies to increase, as the effects of the Covid-19 pandemic takes its toll.

  The Effect Of Government Support

  However, as the article suggests, it would appear that the unprecedented level of Government support is lowering the numbers. The UK Government have supported businesses in multiple ways:

  • Business loans
  • Tax deferrals
  • Grants
  • Suspending winding up petitions
  • Stopping commercial evictions

  The article states that the ONS found that 18% of businesses said that they faced a moderate to severe risk of insolvency.

  Note: More about support for struggling companies.

  Concerns For The Future

  The real concern is over the future for UK businesses. Especially in the light of the imminent second lockdown that is about to wreak havoc on what is a key selling season for many.

  The assumption is that these Government measures will help get them through these difficult times, which they very well might. However, there will undoubtedly be some "zombie companies" within the numbers (perhaps within the 18% mentioned above) whose demise is just being postponed by these actions. Now of course that does not mean that the UK should not be supporting businesses, that support is critical at the present time.

  This is more a note of caution for the future, a future where we could see insolvencies surge and much of the debt owed to the Government being unpaid. I have already heard of debt collectors being recruited in order to help manage the potential defaults on the loans - not an encouraging sign.

  Restructuring And Turnarounds

  There will be options that might mitigate some of those cases. Restructuring finances can form part of a business turnaround plan that can lead to companies being rescued from potential insolvency. The fear is more for those businesses that are unable to be saved, where these measures are just delaying the inevitable insolvency.

  These failures will have a knock on effect upon the rest of us. If a business fails owing money to other businesses that can cripple the cash flow of a supplier that is otherwise sound. Spreading a company's dependence upon small numbers of debtors is of course a solution, but that might be difficult to achieve in the current climate seeking bad debt protection is another.

  By Glenn Blackman