Coronavirus and the impact on UK insolvencies
We've spoken to insolvency expert, David McGinness, Insolvency Practitioner at French Duncan Restructuring & Debt Advisory, on how the coronavirus pandemic has impacted businesses across UK and what the future holds for them.
David McGinness has more than 15 years experience in all types of personal and corporate insolvency. Through the course of his insolvency career, he has had extensive experience in dealing with distressed properties through insolvency and is also experienced at forensic analysis of accounting records, identifying and pursuing challengeable transactions.
Some have predicted a tsunami of corporate and personal insolvency coming down the line. The same was predicted during the financial crisis in the late 2000s but it never really materialised. What’s your view on the outlook?
At the outset of the pandemic, it was widely assumed that lockdown would result in a significant upturn in both corporate and personal insolvencies, as individuals and companies struggled to meet their obligations to trade creditors and lenders.
However, due to unprecedented support by Western governments, this has not materialised. The extent of the support has been jaw-dropping. At the end of 2020, quantitative easing by the Bank of England totalled £895 billion. In the US, it’s even more startling: 3 trillion dollars have been pumped into the economy. This does mean that inflation rather than insolvency has become the preeminent worry - it’s fun to look at Google UK’s search trends. The word liquidation was most searched for in March 2020 but has declined ever since, while inflation increased in popularity peaking last month.
While the Bank of England remain confident that any upcoming inflation is likely to be transitory, I’m not sure it will be. Anecdotal evidence of shortage city centre chefs getting £10k pay rises to stop them leaving, along with a shortage of any number of raw materials, may mean that to avoid an upturn of insolvencies will depend on companies’ ability to withstand price increases across their supply chain. And, in the medium term, on individuals being financially robust enough to withstand rising interest rates as the Bank of England try to bring it back under control.
Formal insolvency numbers, both personal insolvency and corporates, have been extremely low during the pandemic. How much of this is attributable to the levels of economic support given by the government and what effect has some of the other non-financial temporary support measures had?
The economic support available has undoubtedly helped companies and individuals avoid insolvency. However, the temporary ban (moratorium) on commercial evictions has been the other key element which has protected businesses.
This has not improved relations between commercial tenants and landlords, with collection rates running at around 20%. The trade body, UK Hospitality, estimates that £2bn in rent is owed by hospitality businesses with 40% of premises still negotiating over current unpaid rent with landlords. The details of the newly introduced binding arbitration process to guide settlements between landlords and tenants will be interesting.
How much impact will HMRC’s attitude to taxpayer debt have on the ability of the economy to recover?
HMRC is an ever-present creditor in most insolvencies. The Business Secretary recently wrote to R3, the trade association for insolvency and restructuring professionals, stating that HMRC will take a cautious approach to enforcement which will be driven by lack of engagement rather than their inability to pay. HMRC has also recently updated their guidance on what customers with tax debts can expect.
While this is encouraging, it may ultimately make recoveries for insolvency practitioners more difficult - assets gifted without consideration or at undervalue are only challengeable for two years (or five years for associated parties) from the date of a formal insolvency appointment. It is hoped therefore that HMRC ensures some analysis is carried out before granting continued forbearance.
How proactive have businesses been to restructure operationally and financially to recovery from the pandemic economic shock?
While the insolvency market has of course been relatively quiet since COVID began, companies all over the UK have been undertaking huge shifts in their operations, structure and financial forecasting.
My colleagues in other areas of our business from HR and payroll to accounting and tax, have been assisting clients to make these shifts and they report that our client base has been hugely adaptive and innovative in how they have responded. And while some of the changes are likely to be temporary, a significant amount will be permanent. The continued dominance of technology in our lives, and the growth of tech stocks during this period, reflect the seismic and permanent change in work, leisure and retail as cloud computing, digital marketing, sales and fulfilment take larger market share. More locally, our FD Intelligence team staff numbers have quadrupled, in this time, as more and more clients revisit business processes to deploy staff more productively and stay ahead of their competitors.