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Two years since Covid-19 – is this a tipping point for company insolvencies?

04-04-2022|Anthony Gougeon

Guest article by Keith Tully of Real Business Rescue

Over two years ago, the Covid-19 outbreak was declared a pandemic which triggered a chain reaction around the globe comprising national lockdowns, border closures, and a hiatus in overseas travel. The UK economy ground to a standstill, marking the steepest drop in GDP since official record taking began in 1948. Consumer spending drastically declined by 7% in 2020 as national lockdowns hampered footfall numbers.

Temporary guidance to work from home sparked the beginning of a new era of remote working, transforming shopping habits in tandem. Store closures pushed businesses to accelerate the adoption of digital technology in order to continue serving customers diverted to e-commerce platforms.

Keith Tully, a company insolvency and restructuring specialist at Real Business Rescue, tracks the effect of these transformative changes and unprecedented challenges on the financial health of businesses and corporate insolvency figures.

Digital transformation – an opportunity or a cause to an end?

The pandemic played the role of protagonist in rehauling the technological standards of businesses and repurposing digital services into bread-and-butter platforms. It proved to be a catalyst of change as businesses once reliant on in-store services, rerouted investment to digital platforms to adjust to Covid-19 trading conditions.

According to a new McKinsey Global Survey, companies accelerated the digitization of their customer and supply-chain interactions and of their internal operations by three to four years as a result of the pandemic.

Although the Covid-19 pandemic provided a suitable launch pad for businesses looking to dabble in the world of e-commerce and upgrade technological standards, it represented a period of serious economic struggle for businesses with limited capital, high debt levels and cash flow problems.

Government-backed loans, such as Bounce Back Loans, were available to businesses adversely impacted by the pandemic, however, strict restrictions applied to businesses classed as ‘in difficulty’. Therefore, businesses unable to finance the necessary adjustments required to continue trading throughout the pandemic were likely to experience a decline in income.

The pandemic posed as a survival game to businesses already at risk of becoming insolvent, creating a tipping point for those unfit to continue trading under such challenging conditions.

What do Covid-19 insolvency trends show?

To accurately gauge how Covid-19 contributed to corporate insolvency levels, it must be noted that the moratorium on winding up petitions was in place until the end of September 2021.

As part of the Corporate Insolvency and Governance Act 2020, creditors were temporarily restricted from forcing businesses into insolvency over non-payment. This measure was introduced to protect viable businesses from the threat of compulsory liquidation from creditors.

From 1 October 2021 to 31 March 2022, new insolvency restrictions were set in place.

  1. Protect businesses from creditors insisting on repayment of relatively small debts by temporarily raising the current debt threshold for a winding up petition to £10,000 or more.
  2. Require creditors to seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with winding up action.

Although the government continues to protect businesses from creditor action, the lifting of the moratorium is likely to have affected insolvency rates.

The latest Red Flag Alert report from Begbies Traynor shows that 589,168 UK businesses reported significant financial distress during the final quarter of 2021, a 5% rise on the previous three months. It also showed a 106 per cent rise in County Court Judgments (CCJs).

A County Court Judgment is often the first step leading up to a future insolvency as creditors seek to use the courts to recover debts.

The route out of insolvency is a guided path

The fortune of a business in financial distress can be turned around with a little breathing space from creditors, which can be achieved through a Company Voluntary Arrangement (CVA). A CVA is a formal insolvency procedure administered by a licensed insolvency practitioner. During a CVA, the lines of communication between creditors and the debtor are opened to negotiate a formal payment plan.

If you are struggling to repay a Bounce Back Loan, a licensed insolvency practitioner can advise you on company closure options.

If the potential of your business is limited due to a shortfall in cash, growth finance may be your answer, subject to creditworthiness and the long-term effects of Covid-19 on affordability.

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