There’s been a lot of concern expressed that an imminent rise in corporate failures is on the cards as soon as support from the government unwinds.

While I think a rise is likely, I don’t feel it’s bleak as the commentators are suggesting. As with any challenging time in business, it’s not the biggest or strongest that survive, it’s those that can adapt the quickest. 

Coronavirus business support measures ending

Well, on the face of it, a rise in corporate failures is entirely likely when the Job Retention Scheme ends in October alongside other measures and businesses venture back into the commercial world unassisted for the first time since the start of the lockdown. 

Not as bleak as the commentators predict

I think that it is likely that we will see a rise in corporate failures but perhaps not as much as some commentators might imagine. I say that because I would never under-estimate the commercial awareness and the quality of the management that we see all around us in business. There are some great minds, great thinkers and incredible levels of determination that will help to deliver positive outcomes.

The need to adapt, evolve and plan

In recent years, there has been a much sharper focus of effort by management on business resilience. When I spoke on the subject at a conference in May 2019, I observed a clear awareness that businesses need to adapt, evolve and organise themselves appropriately over their life cycle to improve business survival rates. At that time, very few people could have predicted the COVID-19 pandemic, but well-managed businesses were always aware of the Darwinian principle that it is not the biggest or the strongest that survive - the survivors are those who can adapt the quickest.

For some businesses the damage to their sector, supply lines or customer base, will be too severe and they will become a business failure statistic. However, many others will have used the last few months to perform a deep and far-reaching review of their business model, their overhead structures and their working patterns. Businesses need to do this to remain relevant and they will emerge, wounded, but capable of a full recovery. Others will positively thrive under the new post-COVID 19 era, whenever that happens, particularly if they have the vision, courage and the ability to invest for a new future.

The time may have come for some

The government assistance provided to all companies will have been received by businesses that were already in financial difficulty before the additional problems arising from the pandemic. Some of those businesses have very little financial backing and their shortage of capital will make them much more vulnerable. In some respect, the financial assistance has delayed what was already an inevitable - business failure. That is a concern as our insolvency law (as it currently stands) will time-bar the challenge of directors’ conduct, such as paying some creditors in preference to others, if the preference happened more than six months before a formal insolvency appointment is made. Delaying the failure could mean that unfair preferences could become unchallengeable. Some of the government’s actions might, therefore, have unintended consequences.

Preferential creditor status of HMRC – the impact

New legislation coming into effect later this year will bring back preferential status to HMRC debts. Some will see this as a good thing, as it will result in improved recoveries of tax debts from insolvent companies; tax receipts that will help towards paying back the escalating government debt. The new legislation is a double-edged sword though. Enhancing HMRC’s ranking in an insolvency will be achieved by eroding the security of bank lending - because HMRC will soon rank ahead of them as a floating charge creditor. This is a big change, with HMRC reclaiming the preferential status that it had for many years up to 2003. The deterioration of a bank’s secured position, with HMRC to rank ahead of them, is not a good situation for a borrower to be in, particularly if that lending is secured by a personal guarantee from the directors. In these circumstances, directors might easily find themselves in a situation that will require a lot of careful consideration because of the potential impact that it might have on them personally.

The importance of early advice

In the coming months there will be some situations that will become very difficult to deal with. Businesses in seemingly impossible situations should seek advice as early as possible.  Doing so will give them more options about their next steps, and allow them to make a more considered decision about how they move forward.

Get in touch

If you’re feeling worried about the various Government support measures unwinding and the upcoming tax deadlines, as well as HMRC's preferential creditor status being restored, please get in touch with us. Get in touch with me or your usual Johnston Carmichael adviser now.

The earlier you speak to us, the broader your range of options for turning your situation around. We’re here to help and ready to get started.