Calm before the insolvency storm

February 15, 2023

Don’t be fooled by the relatively low headline figure for company insolvency figures in January.

At 1,671 the number for England and Wales was 7% up on January 2022 and 11% higher than the pre-pandemic period in 2020. It doesn’t sound too terrible, given the economic woes facing the UK and the many cost pressures felt by businesses of all sizes at the moment. The number was also an encouraging drop from the 1,964 recorded in December.

More alarming, however, is the 52% year-on-year rise in compulsory liquidations to 189 recorded by the Insolvency Service. The figure is chiefly a result of a hike in winding-petitions brought by HMRC and it suggests that, for many businesses with tax debts, the authority’s patience is wearing thin. Forbearance during peak-Covid and beyond was generous and HMRC is generally reluctant to force companies into liquidation, wasting time and public resources, until it has exhausted all other routes to collect.

Expect all these totals to start climbing steadily as soaring energy costs, employees’ pay demands and higher interest rates continue to paint managers into a corner. Poor cashflow is the biggest killer of businesses, particularly SMEs. Robbing Peter to pay Paul is too often a miserable combination of late settlement with suppliers and non-payment of corporation tax and/or VAT.

Sensible managers won’t bury their heads in the sand and will take action sooner rather than later to keep their businesses afloat and stay on the right side of HMRC:

• Get on the front foot with tax. Engage and explore a time to pay arrangement. Being unresponsive only aggravates HMRC and hastens a winding up petition.

• Look at extending credit terms. Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.

• Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.

On the flip side, suppliers to troubled companies must have the confidence to chase payment and enforce their terms, regardless of the perceived risk of upsetting a customer: if a business agreement is too fragile to able to discuss money indisputably owed, then it will invariably lead to a bad debt, at least in part.

All businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to minimise the impact of late payments. 

Written by James Bryan, Restructuring Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

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