A new study by insolvency trade body R3 has found that 93.7 per cent of practitioners expect a higher number of corporate insolvencies in the next 12 months, with 56.1 per cent saying they expected a ‘significantly higher’ number of cases and action. This would seem to be at odds with the statistics from the Insolvency Service for April, May and June, which show that the number of insolvencies is down respectively by 17, 30 and 50 per cent compared to the same months last year.
However many insolvency experts believe that the reduction of Government support in the coming months, combined with the end of the temporary suspension of statutory demands and winding up petitions means that a sharp rise in business failures could be just around the corner.
This suspension has been in place since 23 April following an announcement by the Government that it would suspend actions against struggling businesses. This has since been codified and built upon in the Corporate Governance and Insolvency Act 2020, which backdated the suspension from 1 March onward.
Former president of R3 Duncan Swift says most companies have not been abusing the suspension period. He said: “[The suspension] is a fairly blunt instrument to prevent unwarranted enforcement action that has a risk of being abused by businesses. In my experience, the vast majorities of UK corporates and their boards of directors are navigating the pandemic crisis with a straight back.”
The temporary suspension outlined in the Act will end on 30 September, unless the Government decides to extend it until March 2021. This would mean that courts, which are likely to be also dealing with other claims, such as evictions and repossessions, will not start hearing creditor petitions and demands until 1 October. Of course, many creditors cannot afford to wait for the courts to reopen and are instead renegotiating contracts and terms of payment with debtors.
According to Duncan Swift, it is likely to be the third and fourth quarter of 2020 that is most critical as most projections in a single ‘hit’ scenario see a large pickup in the UK economy during the second half of the year. He added that most insolvencies do not tend to occur at the bottom end of an economic cycle but rather during the recovery period.
“There are more formal insolvencies as you exit recession than going into one. During the recession companies and businesses are finding their way and trying to navigate through a low period,” added Swift.
“Coming out of the recession businesses begin to ‘accelerate’. They start to see demand restored to normal or in some cases higher level to what it was before. If you’re coming out of a recession, invariably the corporate as an entity has a weakened working capital position. They end up with a position of over trading where the company runs out of working capital trying to meet the restored or enhanced level of trade.”
If you or a client is concerned about a surge in insolvencies later this year and the impact it may have on their business then it is important that they seek professional legal advice at the earliest opportunity. To find out how our insolvency experts can help, please contact us.