In Focus Commercial Credit
A perfect storm of an insolvency crisis?
Businesses have been warned of a perfect storm with quarterly rents due and the end of furlough whilst protections from personal liability for directors are set to be lifted
Oliver Collinge Director, PKF Geoffrey Martin & Co
Insolvency figures released last month by the government’s Insolvency Service show a 33% fall in company insolvencies in the five months since the start of lockdown (April to August 2020) compared to the same period last year. However a perfect storm facing businesses across the country. Quarterly rents are due at the end of
September putting cashflow pressure on businesses that are already struggling, particularly in retail and hospitality, and the government’s furlough scheme also ends next month. The end of the Brexit transition period in less than four months is also likely to place additional pressure and costs on companies that trade with the EU.
Wrongful Trading legislation, temporarily
suspended in March to give directors the confidence to continue trading through the lockdown, is being reintroduced in October. This means that directors who are unsure of their firm’s viability but continue to trade face potential personal liability if their company ultimately becomes insolvent. The latest insolvency figures may appear
counterintuitive to many given we are in the middle of a pandemic, but they are primarily a result of the huge effort made by government to support businesses through lockdown and we expect the trend to reverse sharply over the next few months. With quarterly rents looming and as government life support is withdrawn, we
anticipate a spike in companies in financial distress, particularly in hospitality, leisure and retail. Many normally successful firms are
beginning to experience financial pressure and companies in areas of the country where local lockdowns are in place will also be at particular risk.
Interventions The government’s interventions and the general climate of leniency from HMRC, suppliers and lenders are beginning to recede, but proactive planning and actions at this stage can prevent a challenging situation from developing into a critical one. Relying on existing cash reserves in the
With quarterly rents looming and as government life support is withdrawn, we anticipate a spike in companies in financial distress, particularly in hospitality, leisure and retail
Looming pressures Despite these looming financial pressures, government measures introduced to shield directors from personal liability during the Covid crisis are due to expire at the end of this month.
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hope that things will return to normal soon is a high-risk strategy. Businesses are advised not to bury their heads in the sand and instead seek help from professionals. By planning for a variety of scenarios
including further Covid restrictions, preparing realistic trading forecasts and having up-front conversations with suppliers, landlords and lenders, firms will be better placed to navigate the challenging months ahead. For some businesses, when the furlough
scheme comes to an end, a reduction in headcount will be unavoidable. Quite apart from the emotional challenges of making redundancies, in many cases there is also a large cashflow impact. If redundancies are necessary, businesses
may be able to claim financial assistance from the Redundancy Payments Service (part of DBEIS) to help pay for them. CCR
October 2020
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