KNOWLEDGE

Insolvency update 2021

Morton Fraser Partner Alan Meek
Author
Alan Meek
Partner
PUBLISHED:
02 February 2021
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category:
Blog

The challenges facing the businesses of the United Kingdom at the start of 2021 are perhaps greater than any of us have seen in our lifetimes. In addition to the economic consequences of the restrictions on daily life imposed to counter Covid-19, we are now seeing the effects of the exit of the UK from the EU with businesses having had little time to get up to speed on the new regime.

Against this background, attention has turned to what this harsh economic climate will mean for companies and their stakeholders and the options open to them to mitigate the harm. Different companies, different businesses and different sectors will all face their own challenges. Some of these challenges will be unique to particular companies or sectors; some will be common across the whole economy. The options for addressing these issues will largely be played out in the context of the law and practice of insolvency and restructuring and what is, and is not, permissible and achievable for distressed borrowers and the rights (and appetites) of key creditors.

That insolvency landscape has changed in several important ways during the year and continues to evolve with extensions to the temporary provisions restricting creditor action. The extension of governmental support schemes into 2021 will also determine how business owners view their short term futures. The economic manoeuvrings of the various governments of the United Kingdom will affect how matters play out and what the insolvency landscape looks like going forward. How aggressively HMRC will be prepared to be in pursuing arrears of tax debt (particularly following the reintroduction of Crown Preference) will be interesting to watch and will no doubt influence the levels of corporate insolvency that we see through 2021.

The latest insolvency figures issued by the Insolvency Service show that corporate insolvencies at November 2020 are approximately 40% lower than in November 2020 (and that appears to have been the case over the whole period since March 2020). On the face of it, that would indicate that the various measures put in place to address the pandemic have indeed had the desired effect of holding back mass insolvencies. In fact those numbers may indicate that the financial support stimuli may even have been over-effective and have actually prevented more insolvencies than necessary. The financial stimuli have been sprayed over the whole economy and have not sought to differentiate between those companies that were distressed only as a result of the pandemic and those that were irretrievably damaged and could never hope to recover regardless of the pandemic. Perhaps that level of granular analysis could never have been achieved in the time available but it is likely to mean that in 2021 we will see a catch up in the numbers of insolvencies and indeed the true effect of the pandemic when the temporary restrictions on winding up are lifted and the financial stimuli turned off. Many (if not all) of those insolvent companies are likely to have been recipients of large amounts of public money (through C[L]BILS, BBLS and other schemes) which may prove to have done nothing other than increase leverage to unsustainable levels whilst temporarily postponing an inevitable insolvency.

The effect of the UK Government's quantitative easing programme should also be taken into account.  This has ramped-up considerably as the UK Treasury has issued increasing quantities of gilt programmes, most of which have then been purchased by the Bank of England.  This ongoing injection of emergency capital into the UK economy must surely have consequences at some point, and most probably in the form of inflation.  If the Bank of England's base rate is increased in order to bring any such inflation under control then the consequences for over-leveraged businesses (including those who have availed themselves of C[L]BILS and BBLS loans) become exponentially worse, potentially tipping more UK businesses into insolvency processes.

On a more positive note, the vaccine roll out is of course good news. The thought that things may be able to return to some sort of normality and that there may well be light at the end of the tunnel is of course immensely welcomed. Without wishing to dampen the mood unduly, the effects of the pandemic and the cost of support to businesses will be felt for a considerable period into the future. Add to that the uncertainty of the impact of Brexit on the economy and it is likely that even when the pubs, theatres, restaurants and shops all fully reopen and daily life returns to what we are used to, the UK economic situation will be markedly different from what it was at January 2020. Increased working from home will change how our city centres operate and will imperil the viability of many of the businesses in the towns and cities that depend upon a daily army of workers visiting every day. Whenever "the future" arrives, and whatever it will look like, it is likely to be substantially harder for many businesses than the immediate past.          

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