Rise in insolvency and creditor action expected

Rise in insolvency and creditor action expected

Practitioners braced for “storm” of activity

Rise in insolvency and creditor action expected

Following the end of the temporary suspension of statutory demands and winding up petitions, in addition to the tapering off of government support in the autumn, insolvency practitioners anticipate a sharp increase in the number of insolvencies.

Statistics for April, May and June from the Insolvency Service see the number of insolvencies down respectively by 17, 30 and 50 percent compared to the same month last year. Compulsory liquidation, which requires a winding up order are down by as much as 88 percent compared to same period last year.

“We will be definitely seeing a material uptick in insolvencies when we’ve had a 30 percent [in May] reduction. There’s no way that’s going to be sustained. We’re going to see a significant increase not only in the last quarter, but you will see a significant increase year on year”, says Blair Nimmo, global head of insolvency at KPMG.

A survey published earlier this month by R3 found that 93.7 percent of practitioners expected a higher number of insolvencies in the next 12 months, with a majority (56.1 percent) saying it would be significantly higher.

While Nimmo sees a wave of insolvencies following the end of government support measures, he does not believe it will be ruinous.

“Do I see an acceleration of insolvencies and closures in the last quarter, Yes I do. Will it be Armageddon? I don’t think so.”

“Well-managed businesses that were perfectly viable pre-coronavirus will survive. It will be difficult and many companies’ trade performance will be materially poorer. But a combination of good management, support from stakeholders and help from government schemes will help.”

Statutory demands and winding up petitions

Since the start of lockdown on March 23 and further April 23 when Businesses Secretary Alok Sharma announced the government’s intention to suspend winding up petitions and statutory demands, insolvencies have been down across the board. The suspension was codified into law in the Corporate Insolvency and Governance Bill which received royal ascent in late June and backdated the suspension from March 1 onward.

Former president of R3 Duncan Swift says most companies have not been abusing the suspension period.

“[The suspension] is a fairly blunt instrument to prevent unwarranted enforcement action that has a risk of being abused by corporate. In my experience, the vast majorities of UK corporates and their boards of directors are navigating the pandemic crisis with a straight back.”

The temporary suspension on statutory demands and winding up petitions, which lasts until September 30 (though extendable to March 2021), means courts will not hear creditor petitions and demands until October 1 at the earliest. Roger Elford, partner at Charles Russell Speechlys says the majority of potential petitions come October are between landlords and tenants.

“Many retailers have not paid their Q1 or Q2 rent. Those rents are not being written off, they are being deferred. If there is not a payment installment plan in place come September, there will be three quarters of rent outstanding. If the gloves come off and landlords start using statutory demands again, I think we will see a massive increase in the use of them.

Creditors for their part are not sitting and waiting for the suspension period to end and many are renegotiating contracts and terms of payment. This is on the understanding that it is better for both parties to come to an amicable solution rather than through the courts, given the uncertain economic outlook.

“There is a recognition that companies need to be given a little bit of time to work out where they stand on what their options are. That being too hostile, too early will be inappropriate in many cases”, says Jo Windsor, partner at Linklaters.

“There is an element of people stepping back and saying ‘should we give [debtors] a chance? Should we give them a bit more time to see how the economy is fairing?’”

The third and fourth quarter of this year will be critical as most projections in a single ‘hit’ scenario see a large pickup in the UK economy during the second half of the year. However, in a typical economic downturn, most insolvencies occur not at the bottom of the economic cycle but during recovery says Swift.

“There are more formal insolvencies as you exit recession than going into one. During the recession companies and businesses are finding their way and trying to navigate through a low period.

“Coming out of the recession businesses begin to ‘accelerate’. They start to see demand restored to normal or in some cases higher level to what it was before. If you’re coming out of a recession, invariably the corporate as an entity has a weakened working capital position. They end up with a position of over trading where the company runs out of working capital trying to meet the restored or the enhanced of the trade.”

Nimmo says the silver lining in this crisis is that there is more money flowing now compared to the previous financial crisis and that bodes well for companies to survive as a going concern.

“You don’t get much putting cash a bank these days. There will be companies with strong balance sheets or funders looking for good places to invest in.”

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