Corporate insolvencies fell by 27.1 percent for 2020 in England and Wales but the statistics don’t convey the distressed situation many businesses across the UK find themselves in, according to Azets restructuring and insolvency partner, Stephen Grant.
“At face value, the reduction in corporate insolvencies seems like cause for celebration, but these numbers mask the true extent of the damage done by the pandemic,” Grant said in a press statement.
“There’s a bit of a wartime spirit out there as well – people are being quite forbearing. The government has obviously put in some support, and also the courts are effectively closed so nobody can really enforce anyway,” Grant said.
The president of insolvency trade body R3, Colin Haig said the government’s coronavirus support measures for business had “deferred” the economic effects of the pandemic, but not “deterred” them.
“It’s a question of when, not if, levels of corporate insolvency increase this year, but the timing will depend on when – and how – the Government support ends,” Haig said in a press statement.
“The whole insolvency profession is predicting a tsunami later on in the year when some of these measures are released because a lot of debts have been deferred, it hasn’t been written off,” Grant adds.
Grant says the phasing out of government support this year will be key too and with the furlough scheme currently set to end in April, business support like this must coincide with a return to normality.
The global financial crisis of 2007-08 led to the rise of so-called “zombie companies”, large firms that were only viable due to bailouts or low interest rates. Now there is a risk of zombie SMEs, or SMEs that are saved from insolvency only with ongoing government support and loans.
“From a government perspective, if you have got some companies, zombies just bouncing along, they might not be doing very much but they are providing employment. Assuming they are selling things, they’re probably paying VAT, PAYE, NIC and it’s keeping people off social security.
“But you need a bit of a clear-out and a bit of a natural, survival of the fittest,” he adds.
Reports have suggested that pent-up demand in the economy caused by national lockdowns and social distancing measures over the past 12 months will see a limited comeback for the high street and other sectors, says Grant.
“People are going to be gagging to go out, to eat and drink in pubs and restaurants, but they’re not going to go and eat a year’s worth of food and drink a year’s worth of beers, tempting as that might sound.
“It’s that historic hole in your finances now that needs to be filled as well. I think it’s about sharing the pain. Landlords are going to have to share some pain, permanently. The owners of the businesses are not going to be able to take out quite as much as they have historically. The creditors are going to have to be part of that [as well].
“If you’re trading profitably on the other side, you will be flowing out positive cash and some of that cash is going to have to go to pay off historic liabilities,” Grant adds.