An overwhelming majority (93.7%) of respondents to a survey of members of the insolvency and restructuring profession carried out by the profession’s trade body R3 expect corporate insolvency numbers to increase over the next year.
More than half (56.1%) of the respondents to R3’s member survey who work in corporate insolvency said they expected corporate insolvency numbers to be significantly higher than in 2019, while 37.6% think they will be somewhat higher.
And out of those who said they expect numbers to rise, nearly six out of ten (56%) think the increase will happen in October-December 2020, while more than a quarter (26.3%) expect it to occur in January-March next year. Just 16% think corporate insolvency numbers will increase in July-September 2020.
Despite the predicted rise in corporate insolvencies, less than half (42.9%) of survey respondents said they were busier than normal, 15.3% said their workload was unchanged, and 41.3% said their workload was lighter than usual.
Asked about demand for corporate insolvency procedures over the past month (April 2020), those who said demand had increased (38.1%) were outnumbered by those who reported that it had decreased (45.5%).
Duncan Swift, Past President of R3, says: “Despite the lockdown, the economic turmoil and the fall in GDP of more than 20% in April, corporate insolvencies in April and May actually decreased in comparison to the previous months, according to the Government’s figures.
“This is in no small part due to the Government’s support measures, which have helped a number of businesses that would otherwise have struggled as a result of the pandemic.
“Our members also told us that during April and May, the enquiries they received were mainly around advice on companies’ eligibility for the state-provided relief packages, rather than formal insolvency support.
“However, it’s clear from the results of this survey that it’s a question of when, not if, corporate insolvency numbers increase, as the support available to businesses has deferred rather than deterred the rise in corporate insolvencies you would expect to see in an economic climate like this.
“We would urge anyone who is concerned about the future of their business to seek advice as early as possible. Doing so will give them more options about their next step and allow them to make a more considered decision about how they move forward.”
Respondents felt the main triggers for corporate insolvency advice over the next 12 months would be rent payments or arrears (61.7%), trade debts (49.7%), tax payments or arrears (48.1%), and wage payments (35.5%).
Drinking, dining, tourism predicted to suffer most
Participants were also asked which three sectors of the economy would be most affected by the COVID 19 pandemic. Nearly four in five (79.8%) said pubs/bars; a very similar proportion (78.7%) said restaurants; and 63.9% said tourism operators. Hotels (40.4%) and retailers (31.1%) were also identified as likely to be affected.
Swift says: “It’s not surprising that the sectors of the economy that our members expect to be hardest-hit are those where physical interaction with customers is a critical part of day-to-day business.
“For many retail, hospitality and leisure sector companies, margins were already razor-thin before the pandemic, and relied on operations running at or near capacity. Lots of people are undoubtedly very keen to get back to social venues such as pubs and bars, to go on holiday, and to enjoy a meal out after a day’s shopping – but the necessary public health measures that these businesses will have to put in place for this to happen safely will put their potential profitability in doubt when they reopen.”
CVLs and administrations predicted to be most used processes
Asked which insolvency and restructuring tool they thought they would be most likely to recommend over the next month, 26.5% of respondents said they expected to recommend financial restructuring; 19.1% said they expected it to be a Creditors’ Voluntary Liquidation (CVL).
Over three months, 29.1% of respondents said they expected the most commonly recommended tool to be a CVL; 28% said they expected it to be an administration.
Over a year, 37% said they expected a CVL to be the most common recommended tool; 34.9% said they expected it to be an administration.
Swift says: “Our members expect demand for support to shift from restructuring work towards more traditional insolvency processes over the next twelve months.
“This is illustrated by the fact that the majority expect to recommend financial restructuring, which isn’t a formal insolvency procedure, over the next month, while over three months and a year administrations and CVLs, which are formal procedures, are the tools members say they are most likely to recommend.
“What this suggests is that the short-term nature of the enquiries is going to be about providing turnaround support for businesses that can be rescued without resorting to formal restructuring or insolvency procedures. In the mid-to-long-term, the balance will shift to supporting businesses through an insolvency process – some will still have a prospect of rescue through administration, while others will simply be too far gone and will be wound-up through a CVL. The question is how this balance between rescue and winding-up will play out over the coming months.”
Job Retention Scheme very effective, R3 members say
When asked which of the Government measures they would describe as ‘very effective’, seven in ten (70.5%) named the Job Retention Scheme, nearly half (45.9%) said tax payment deferrals, and more than a third (35%) named the business rates holidays.
Swift says: “Employee costs are typically the largest expense for a business. The Government’s Job Retention Scheme has lifted much of this obligation from the companies which took part in it, while tax payment deferrals also help manage a big expense and a common trigger for corporate insolvencies.
“As a result, any income businesses receive during the pandemic can go towards supporting their future activities and mean that supply chains can continue to function in some way during the pandemic. One business’s insolvency can have a ‘domino effect’ on its supply chain, and the Government measures have helped to reduce the risk of contagion spreading from one company to others to which it is linked.”