Kroll's Benjamin Wiles on paving the way for bounce back Britain

As part of the UK government’s efforts to ensure the economy remained buoyant as a result of the pandemic, a peacetime record of £303 billion was borrowed during 2020, on top of the nation’s already mounting deficit.

The Office of Budget Responsibility (OBR) is taking an upbeat view predicting an increase in UK GDP of 4% in 2021, followed by around 7% in 2022. On their assumptions GDP could well be back to its pre-Covid level by mid-2022, which is six months sooner than the OBR forecast last November. 

It is also worth recording that GDP under this modelling is still forecast to be 3% lower by 2026 than it would have been if Covid-19 had not happened.

And yet despite the doom and gloom associated with the fall in GDP, corporate insolvencies appear to be telling us a different story. The latest figures from the Insolvency Service report that corporate insolvencies fell by 9% to 686 in February 2021 compared to January’s figure of 754 and were 49% lower than February 2020’s figure of 1,348.

Looking at this at a granular level, in February 2021, when compared with the number of company insolvencies registered in February 2020, compulsory liquidations were 86% lower, Creditor Voluntary Liquidations (CVLs) 38% lower, Company Voluntary Arrangements (CVAs) 68% lower and administrations 62% lower. 

It sounds counter intuitive to the broader narrative on the impact the pandemic. But we are seeing the impact of an activist government supporting businesses across two fronts – financial support and the temporary suspension of pre-existing corporate insolvency and governance legislation. 

Supporting the recovery

At the heart of the new support package lies the Recovery Loan Scheme, designed to ensure businesses of any size can continue to access finance up to £10 million per business once the existing Covid-19 loan schemes close. 

The bounce back loan scheme (BBLS), coronavirus business interruption loan scheme (CBILS) and coronavirus large business interruption loan scheme (CLBILS) applications all came to an end on 31 March 2021. The new scheme came in on 6 April 2021 and a number of lenders have already signed up.

Approaching a financial cliff edge

The figures in terms of support already given to UK plc are startling. As of February, £45.6 billion had been deployed to more than 1.5 million SMEs through BBLS, over £22 billion loaned to just under 100,000 businesses via CBILS and over 700 loans worth a further £5.3 billion were granted under CLBILS. 

There is no doubt that the economic impact of the pandemic and the disruption to businesses cash flows has lasted longer than anyone expected. There is little certainty on when businesses can return to pre-pandemic operating levels. As a result, the UK government needed to provide as much support as possible to ensure businesses stay afloat.

Given the scale of government-backed loans now sitting on balance sheets, short term cashflow concerns may have dissipated for many but the hangover will now begin to be felt over the next six months. VAT deferments now need repaying, loans need servicing, staff need to be bought back off furlough, and rent arrears need settling. Corporate Britain has been piling up the debt and while that may have seen many through the pandemic, payback time is starting. 

Insolvency protection extended

In a critical move the Corporate Insolvency and Governance Act 2020 (CIGA 2020), which received Royal Assent on 25 June 2020, has seen the temporary measures it introduced extended enabling the Government to use the measures only until in some cases the end of June or September for others. 

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021 has extended the key measures in different ways. 

These can be summed up as follows:

• The suspension of liability for wrongful trading has been extended until 30 June 2021 for directors who continue to trade a company through the pandemic with uncertainty as to whether their company may be able to avoid insolvency in the future.
• The prohibition on termination clauses is also extended until 30 June 2021, although small suppliers will remain exempted from the obligation to supply.
• The relaxation of entry requirements into the new moratorium procedure will also be extended, in this instance until 30 September 2021.
• The continuation of restrictions on statutory demands and winding-up petitions until 30 June 2021. 

For directors who may have previously hurried to start insolvency proceedings and avoid the possibility of any personal liability, the temporary suspension will help postpone many from triggering that process and assist them to emerge intact on the other side of the pandemic. 

However, on a more cautionary note, company directors must keep in mind that all other sources of risk and liability under the Insolvency Act 1986 are unaffected by the Act. For example, directors are still bound by their fiduciary duties and the fraudulent trading provisions of section 213, which means that they will still face sanctions and penalties if they knowingly attempted to defraud the company or creditors. 

Overall, this means that the temporary suspension of wrongful trading doesn’t change the attention that directors should be giving when evaluating the financial position of their company. Directors’ actions will remain subject to scrutiny, making it critical that they consider very cautiously whether to continue trading if there is not a realistic chance of their company avoiding insolvency.

It remains to be seen whether there will be a further extension of these provisions. Much is likely to depend upon the success of the vaccination programme, and the opening up of the economy and the ultimate recovery.

Landlords and commercial tenants

The Government has also published a consultation paper seeking responses and evidence from the property industry generally as to how negotiations between commercial landlords and tenants on rescheduling rent liabilities have been handled during lockdown.

The protective measures the Government introduced back in April 2020 were only ever meant to be temporary. This was a lifeline for many but now there is a significant risk for those who relied on this during the pandemic that once those protections are lifted – scheduled for June 2021 – businesses may fail when rent arrears are pursued.

That said it is hard to envisage the government allowing a cliff edge to come into view when it has spent so long over the past year seeking to protect embattled businesses. 

There is no doubt that the speed of the Government’s response to the crisis – from the loan schemes through to the efficiency of the furlough scheme – has been impressive. However, for businesses large and small the challenge now is how to come out of this crisis without a dramatic hit to revenue, cashflow or balance sheet. 

Post-lockdown outlook

There is also pent-up private equity demand and high levels of debt funding. This desire to deploy capital, combined with what we could term a ‘flight to quality’, mixed the optimism as a result of the vaccine programme, as well as near record levels of corporate liquidity and a strong market for M&A, we could well see a positive market.

If directors are worried that their business is in or expecting financial difficulty, it is crucial that they continue to consider the needs of all key stakeholders and creditors in any decision and maintain ‘good housekeeping’ in the form of board meetings and keeping records of actions taken with an assessment of the reasons for certain decisions. Where possible, they should also seek appropriate professional advice. 

An article by Benjamin Wiles, a Managing Director in Kroll’s Restructuring Advisory practice in the UK.