Firms must be proactive in consulting restructuring experts

As the UK Government’s temporary restrictions on insolvency procedures are phased out, restructuring firms will soon be in keen demand – meaning struggling companies which act slowly will find it harder to get support. Kroll experts Paul Reeves and Joanne Wright recommend a triage approach to overcome the challenges ahead.

Over the course of the Covid-19 pandemic, the UK Government has placed many businesses under intense pressure with its lockdown measures. To offer such firms support throughout the crisis, the Government put in place a number of schemes – and not just relating to the supply of loans or salary cover.

Over the last 18 months, the Corporate Insolvency and Governance Act 2020 placed temporary restrictions on creditor action. While since its passing, the Act prevented businesses suffering financial distress due to the coronavirus crisis from being forced into insolvency, the UK’s Insolvency Service has now announced that the measures are to be phased out.

Paul Reeves, Managing Director in Restructuring Advisory with professional services firm Kroll, explained, “Effectively, this means that a business’ creditors can serve statutory demands and present winding-up petitions, albeit that a minimum debt level of £10,000 is required during a phased period ending in spring next year. During this phased period, landlords will still be unable to petition for winding-up in relation to outstanding rent and similar debts.”

Joanne Wright, a fellow Managing Director in Kroll’s Restructuring Advisory team, added that Kroll anticipates this having a knock-on impact on the UK’s insolvency market. As the country emerges from over 18 months of insolvency restrictions and creditor forbearance, there have been near record lows of corporate failures – but now they are on the rise again, and “it is expected that we will see three distinct scenarios moving forward.”

First, Wright noted, “There will be the zombie companies that have been artificially propped up and likely to offer little resistance to the winding up action coming their way. This, however, will not be the end of the story as the spotlight will then focus on the activities of their directors during this period, particularly in relation to the use of any government assistance.”

According to the two Kroll experts, there will also be businesses that are “inherently viable,” but the level of debt they are incumbered with is making survival in their current form “unlikely.” In this situation, firms may look to restructuring specialists to help usher in a Company Voluntary Arrangement (CVA), or pre-pack administration. While both moves have pros and cons, they can ultimately ensure a business which was going to collapse can survive.

Finally, some businesses will have a significant debt burden, but can be nursed back to health without the need for an insolvency process. This is easier said than done, though, and they will likely need external advice to help recognise opportunities to perform manoeuvres such as ring-fencing liabilities like HMRC debt – via a formal Time To Pay proposal – or to considering any debt re-financing or possible capital raises.

All this will see restructuring specialists come into major demand over the coming months, however. In this context, it is important that firms act quickly, to ensure they are at the front of the queue.

Reeves and Wright concluded, “The insolvency emergency room will soon begin to feel the pressure, and directors should be taking early preventative advice, having the status of their company assessed and seeking appropriate remedial treatment.”