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Insolvency in an atypical recession

Author: ICAEW Insights

Published: 06 Apr 2021

According to Greg Palfrey of Smith & Williamson, we’ll see waves of insolvency this year as sector by sector, businesses feel the pinch.

Government support measures have been a lifeline for millions of UK businesses. As of February 2021, £53.8bn have been claimed under the Coronavirus Job Retention Scheme (CJRS), furloughing 11.2m people. Over 1.5m businesses have received loans worth over £74bn, including future fund loans, business interruption schemes and bounce back loans.

But, says Greg Palfrey, Partner and National Head of Restructuring & Recovery Services at Smith & Williamson, while being hugely supportive, these measures have also kept large numbers of struggling businesses artificially afloat, therefore prolonging the inevitable. It’s why we haven’t seen spikes in firms going into insolvency – at least not yet. 

“It was originally assumed that IPs would be busy in the second half of 2020 once government support was withdrawn, but it was extended instead, so actual insolvencies are well down,” Palfrey explains.

He predicts a surge in insolvencies later this year, although the government will want to smooth things out to avoid mass unemployment. Some companies, however, won’t be worth saving. “The trick is to support those that can survive and allow the assets of others to be recycled by those who can make better use of them.”

In the past, it has been possible to predict insolvency trends based on previous recessions. There are typically two insolvency spikes: one during the first stage of a recession where badly-run companies fail and one at the end where work levels pick up but companies lack the working capital to fund increased demand.

But this is by no means a ‘typical’ recession, and much depends on the continuation of government support measures and many other factors. “Insolvencies are likely to hit in waves and across different sectors at different times,” says Palfrey.

Either way, the UK is in for a very bumpy period, particularly for businesses hanging on by a thread. At some point, Palfrey warns, councils will need to restart collecting rent, banks will collect loans, HMRC will collect debt, and the British Business Bank will recover funds.

So far, hospitality, healthcare, and the charity sector have been among the worst-hit industries and manufacturing to some extent and certain retail areas. Charities, in particular, says Palfrey, especially those who already found it ‘hard going’ pre-pandemic have been greatly affected. Landlords have also struggled, despite public perception that those with property portfolios are financially stable and can withstand long periods without income, which Palfrey says isn’t the case.

It’s easy to forget the human side of insolvency; the jobs lost, livelihoods destroyed, businesses closed. Palfrey talks about the mental anguish directors and company owners will have gone through. Many have felt overwhelmed with the plethora of financial information, the constantly changing government announcements and restrictions and the general lack of certainty. Directors have felt like a rabbit in the headlights, terrified of making a wrong decision, so they don’t make any decisions at all.

“Directors tend to come to us too late when there is no option but financial collapse,” Palfrey explains. “People don’t want to admit there’s a major problem outwardly, so they put it off. Yet the earlier IPs go in, usually the more options there are. Taking the right advice and following that advice from an IP means companies are better protected. However, IPs do not have magic wands and can only deal with what they are given.”

Smith & Williamson have taken a ‘hybrid’ approach during the pandemic to help directors make the best decisions despite their turmoil. It’s about bringing more certainty and common sense into the mix by distilling, optimising and minimising the amount of financial information a director has to absorb. 

“If you’ve not got a lot of time, yet you’ve got to go through a 60-page report, that’s not going to help with decision-making or stress levels,” Palfrey points out. “Our role has been supporting clients to make the right decisions for their company by producing with the relevant available information a concise analysis of the issues and a set of pragmatic options for the company to be able to make as good a decision as time and circumstances allow.”

Palfrey is proud of his profession and the benefit it can bring to people, but he’s frustrated, too. There are connotations with being an IP despite the UK being world-renowned at rescuing businesses nationally and internationally.

“We need a shot in the arm and not just a COVID jab,” he says. “We need a feel-good factor. As an industry, we should focus on what we do well. We have a great and wide toolkit to allow us to help companies where advice is sought in a timely manner, and there is a business to rescue. We must be doing something right for countries such as Singapore, India, Cyprus and Germany to copy many of our insolvency tools.” 

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