Cash flow & legacy debt - the risk of insolvency post covid

Cash flow & legacy debt – the risk of insolvency post covid

May 28, 2021

The insolvency reality during the crisis

There is a common view that insolvency practitioners must have been rushed off their feet during the crisis, as businesses across the economy have been savaged by lockdowns and restrictions.

The reality could not be more different. Government support measures have not just kept viable enterprises afloat, but they have also suppressed business failures to such an extent that company insolvencies in Q1 2021 were down 22% from the preceding quarter and a staggering 38% below the same quarter in 2020.

Insolvencies always lag some time behind economic recessions, in fact generally it is the growth that follows a recession that kills more businesses than the original downturn. This time, things are different in a number of crucial ways:

  • Not only was the collapse in commercial activity in Q2 2020 the worst since the Great Frost of 1709, but the government suspended all the normal workings of the market.
  • Landlords have been unable to enforce rent payments, so that there are now commercial rent arrears of over £6bn.
  • At the start of the pandemic, HMRC deferred huge sums of VAT liabilities and is now offering generous time-to-pay deals for accumulated VAT and PAYE debts.
  • Business rates were cancelled. Creditors have been unable to use Winding Up Petitions to pressurise companies into paying their bills.

Most critical of all, government-backed loans totalling over £70bn have been handed out to around 38% of all UK businesses, with few or no questions at all asked and an initial interest and repayment holiday of a year.

How well are businesses protected?

So far, so good. The question is, have the government’s protection and funding measures been the best economic and business protection plan since the inception of the Insolvency Act in 1986? Or do we have a tidal wave of insolvencies about to break over the UK economy as this ring fence is lifted as the pandemic finally comes under control (variants permitting) and the economy returns to whatever passes for the ‘new normal’?

Nobody can answer those questions yet, but too many businesses have borrowed heavily to fund losses and have also relied upon creditor forbearance to survive. Unfortunately, this means a huge build-up of legacy debts, all of which must eventually be repaid.

The landlord, the bank, the leasing companies and HMRC will all want a slice of a business’s cashflow. On top of this, ongoing payments must be made for new goods and services as businesses restock and start to grow. For some businesses, these cash pressures will simply be too great and insolvency may be inevitable. But for the vast majority, good and effective cash management and early creditor negotiation and dialogue should prevent an insolvency.

The impact of legacy debt on business owners and managers

The worry is that stressed out owners and managers may be too busy getting their businesses back open to concentrate on formulating a plan to deal with this mountain of debt. Nevertheless, this is absolutely no time for complacency about these overdue liabilities.

Some businesses are saying that they plan to review their overall creditor position, in detail, once furlough draws to a close, anticipating that problems can be kept at bay until then. Others still have enough cash left from their CBILs or BBLs to be able to keep their cash flow plates spinning for a while yet. HMRC have not been proactive about chasing up VAT and PAYE arrears, so that businesses may feel that they can leave negotiating an extended repayment plan until they do get in touch.

Although the repayment holiday for CBILs and BBLs has just ended for the earliest of the advances under those schemes, anecdotal evidence suggests that the banks are open to discussions about delaying the start of repayments. Some of the more enlightened landlords are working with their tenants to re-schedule rent arrears.

There is little doubt that for most business managers there are greater priorities, such as managing their return-to-work policies; making their work environment safe for staff and visitors; readying themselves for an increase in activity from the historic pandemic lows and wrestling with the severe labour shortages in some sectors. Understandably, they are looking forward to profitable times, not back to the horrors of running their business in the pandemic.

It is absolutely understandable that there is only so much ‘bandwidth’ available for tackling this once a century crisis, but nobody should risk arriving at the impending cash flow cliff edge without any sort of plan or strategy. Far better to take early advice from independent restructuring professionals, who have the experience and the capacity to concentrate on managing those legacy debts, before matters are taken out of your hands by an unsympathetic creditor.

Quite simply, the time to act is now

When looking to rescue/restructure a business, it is important to speak to independent advisors at the point you anticipate problems rather than the point you are in the thick of firefighting. Across the Group, we have Partners who are here to help you to find the best way forward. We find that the earlier a business speaks to us, the more options are available to address the challenges being faced. Our ethos is to work with people to find solutions, not to judge them. Please speak one of our Partners at your nearest office.