How Covid-19 is impacting small and mid sized insolvency firms

14 September 2020 5 min. read
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The unprecedented economic impact of the coronavirus has triggered a wave of insolvency cases across the United Kingdom. Rebecca Dunne from KSA Group outlines the current state of the insolvency market, and reflects on the impact of the pandemic for insolvency firms focused on the small and mid-sized business segment. 

At first, when Coronavirus and lockdown hit, it was predicted that insolvency practitioners would be very busy as businesses saw customers evaporate or were forced to cease trading. Weaker companies, which were carrying a lot of debt, such as Debenhams, The Restaurant Group, Intu Properties and others, knew that there was no way they were going to survive as the business was in effect ‘already on life support’. 

Consequently, a wave of retailers went into administration or liquidation. A number or retailers immediately sought Company Voluntary Arrangements, a type of insolvency mechanism, as a way to rapidly cut their property costs. 

Government support

Faced with what looked like the biggest blow to the economy since World War 2, the Government had to act.

How is Covid-19 impacting small and mid sized insolvency firms?

A variety of financial support schemes were launched including the Coronavirus Business Interruption Loans Scheme (CBILS), Bounce Back Loans and the introduction of the COVID-19 Corporate Financing Facility. The biggest and most generous of these schemes was the support of jobs by the Furlough Scheme that in effect moved the burden of paying wages from the private to the public sector. This no doubt saved a huge number of jobs and, let’s face it, a complete meltdown in confidence. 

Experience of the financial crisis of 2009 meant that Governments around the world were not hesitant in acting quickly if they needed to. In addition to the immediate financial support, new laws were introduced.

The Corporate Governance and Insolvency Bill

The Government introduced The Corporate Governance and Insolvency Bill. This was the biggest reform to the UK’s restructuring and insolvency framework in over 15 years. The whole purpose of this was to reduce the amount of struggling companies being forced to file for insolvency. The new measures of this bill included the following:

  • temporarily suspending wrongful trading provisions, allowing directors to continue trading without the threat of personal liability provided they were “reasonable”
  • temporarily prohibiting creditors from the use of legal threats (statutory demands and winding up petitions) for companies that are unable to pay their debts due to coronavirus
  • stopping landlords evicting tenants who could not pay their rent
  • enabling businesses to hold closed annual general meetings (online) or suspend them until late September, conduct business and communicate with members electronically and extend deadlines for filing information to Companies House
  • a new moratorium of 20 days to give companies breathing space from their creditors while they seek a rescue
  • prohibiting termination clauses that engage on insolvency, preventing suppliers from ceasing their supply or asking for additional payments whilst a company goes through a rescue process 

These saviour schemes worked and saved many businesses from becoming insolvent. In addition, the self-employed were helped. As such, many insolvency practitioners saw less actual work as less companies were needing rescue. However, initially there was a flurry of enquiries as people sought information, support, and guidance in using the schemes and what they actually meant. 

It is fair to say that insolvency departments of the big accounting firms such as KPMG and Deloitte have been busy advising large firms about their options. In our opinion, small businesses have been much less proactive and are largely operating a “wait and see what happens” approach. Whilst bills are being paid for by the Government and legal action is held back there isn’t much incentive to act. This is a mistake as generally if you plan for failure or disaster then it is less damaging when it actually happens and there is no doubt we are heading for very difficult times as support cannot go on forever. 

So, from analysing the latest company insolvency statistics the number of corporate insolvencies in the United Kingdom has actually decreased overall by 34% in July 2020 compared to July 2019 and it has been a similar pattern in May and June, thus in effect less ‘work’… This is in no doubt due to unprecedented actions and help that has been given to businesses. 

Insolvency practitioners are a regulated profession and there are strict time limits and procedures set in law for them to adhere to when doing business. In fact, insolvency practitioners are deemed as essential workers, as they are involved in ensuring the financial system works correctly, but the this was not immediately apparent so much work was done remotely and it was very difficult to be efficient and follow the rules at the same time. Luckily in the age of video conferencing meetings could still be held and advice given but it took some adjusting for a profession that is not usually associated with being at the cutting edge of technology.

So, in summary, coronavirus has had a mixed effect on the work of insolvency practitioners. It will be interesting to see how it plays out going forward, as the Government support schemes start to unwind… how many ‘rescued-by-Government-support’ based companies will manage to remain afloat when support is taken away?

Overall, at the moment there is not much work for small and medium sized insolvency firms such as KSA Group but this is expected to change over the next couple of months.