We are aware that following the COVID-19 pandemic the business world has changed, with many saying it has changed forever.
The normal working week for many businesses now includes remote working, in particular operating from home and juggling many other demands in the process. As far as businesses are concerned, one of the overriding concerns is the possibility of a world recession and, if that is the case, how long it will last and how damaging the impact is likely to be.
The reality is, no one really knows. The only certainty is that one way or another, the last few months will have a significant and lasting impact upon us all, and only by working together will we resolve the issues and minimise the damage.
On a regular basis, I hear the retort “You must be busy.”
The practical reality is that we are busily occupied dealing with our existing (pre-pandemic) caseload and fielding a large number of queries from our existing and new clients and contacts seeking our guidance on the Government’s financial initiatives, in particular, the government-backed loans and grant schemes in support of businesses.
However, most people may be surprised to learn that corporate insolvencies actually fell by a third in April 2020 compared to the corresponding quarter in 2019. Unlike the financial downturns of old (the last being in 2008) this economic crisis has been brought about not by the collapse of the financial sector, but by a pandemic causing potentially the worst financial downturn in the UK since 1706.
The Government have the difficult task of balancing the physical and mental health of the nation against the health of the economy. Their focus has been on putting in place measures to protect business and maintaining the workforce of many companies by introducing the furlough scheme to reduce the need for formal redundancies, as well as enabling companies and partnerships to defer VAT, personal tax liabilities and accessing cash injections via the various grants and soft loans on offer.
These new measures in conjunction with amendments to the Insolvency Act, and the courts’ deferral of compulsory winding-up orders and bankruptcy notices have had the effect of preventing many thousands of companies and individuals from facing formal insolvency. The significant and intended impact of all of this is to give those businesses that were solvent and trading viably prior to the pandemic a “sound base” upon which to carry on trading following the lockdown.
Inevitably, The Government measures will have given breathing space also to some businesses that were insolvent or facing major financial hardship even beforehand.
There is no doubt that we are going to have a recession.
According to some media outlets, it will be a depression the likes of which have not been seen since the 1930s. The British media have quoted numbers of annual insolvencies ranging from 100,000 to over 1,500,000; however, I don’t believe these numbers serve any purpose other than for making dramatically speculative headlines whilst putting fear into the minds of directors (and employees) who are already experiencing sleepless nights worrying about the future of their businesses and their livelihoods – the reality is that no one knows what lies ahead.
To give it some perspective, the normal level of annual corporate insolvencies lies between 17,000 and 20,000. During the last recession in 2008/09, there were an estimated 28,000 corporate insolvencies.
There have been a number of high-profile companies that have entered administration since the lockdown started including Oasis, Warehouse, Debenhams and the Carluccios restaurant chain. Some of these companies had suffered well-publicised financial issues prior to the pandemic so it is very likely that most would have failed in any event.
The number of insolvencies will depend greatly upon how much businesses are prepared to adapt to the
I anticipate that the majority of companies will see a marked reduction in turnover over the next 12 to 18 months and possibly longer for some industries. As a consequence, the profitability of many will reduce depending upon what steps are taken to adapt and reduce their cost base.
- Some businesses will try to extend their cash flow by deferring payment of trade suppliers and pushing for extended credit terms from 30 to 60 and possibly to 90 days.
- Credit insurance will be more difficult to obtain, and credit limits imposed by underwriters and funders will be reduced.
- Confidence in some markets particularly the hospitality and leisure industries will take more time to recover.
- Landlords will see rental yields reduced.
- Asset values will in the short term reduce and will have a consequential impact on the level of loans available from banks who may have concerns over the strength of security cover.
- Banks and ABLs will require better security provisions and more robust personal guarantees.
- Some businesses will have problems in discharging the VAT and tax payment holidays announced as part of the Government measures, which become due and payable in early 2021.
- CBILS becomes repayable in 12 month’s time and whilst companies will have the ability to repay these by converting them into standard commercial loans the costs of interest plus monthly payments will be seen at that time as another debt and further stress on profitability.
- Remuneration packages and bonuses are likely to reduce or be significantly restrained in the short term and so, the ability of individuals to buy goods and services that are seen as luxury items will be curtailed.
For many, working practises will have to adapt in order to keep competitive and to meet new ways of delivering services and products. The Government will have little option but to increase the tax burden in order to meet the fiscal borrowing necessitated by the pandemic and this will also affect salaries and therefore, the confidence of consumers to spend.
There is much debate as to when we may expect to see the economy bounce back to where it was prior to the lockdown, some expect a V shape (bounce back recession) others an L shape (recession followed by prolonged lack of growth) or even a W shaped recession (double-dip recession).
We must all keep our nerve and work in close partnership with our customers, supply chains, lenders and banks and be prepared to make cuts to expenditure whilst ensuring that we are more adaptable to change and build resilience.
For any companies that are suffering a downturn following the pandemic, but which were viable and solvent prior to March 2020, the Government, following much consultation with the officially recognised representative bodies of the business turnaround and insolvency profession, are busy putting together legislation that will legally protect both the advising practitioners and the companies whilst they explore together all avenues towards survival and future sustainability.
Our practice has been in business for 135 years and the three partners between them have over 100 years combined experience in dealing with all modes of business turnaround and insolvency scenarios. Our highly skilled team of trained and qualified personnel more than double that experience.
Business rescue strategy is key.
The key to resolving a company or Individuals financial issues is to contact a regulated turnaround and insolvency practitioner as early as possible, thus enabling the practitioner the time to investigate model and facilitate the bringing together of a rescue strategy that is to the benefit of all parties.
If you require any further support or advice, please do not hesitate to contact one of our team members who will be pleased to provide the help you seek.