May 2023 Newsletter: One swallow doesn’t make a summer

May 18, 2023

Optimism is generally a good quality when running a business. It fosters positive energy and a can-do approach, without which success is much more difficult. Nonetheless a healthy dose of realism can be a useful balance, not least when assessing the financial health of an enterprise and, in turn, its customers.

Corporate insolvencies eased markedly in April, possibly as a result of greater business confidence, but it may be premature to sing ‘Happy Days Are Here Again’. The latest figures from the Insolvency Service show that 1,685 companies were recorded as insolvent in April 2023, a 15 per cent fall on the same month the previous year. It was also a sharp fall from the 2,457 insolvencies in March. The improved picture was driven by a 23 per cent fall in Creditors’ Voluntary Liquidations (CVLs) – company directors throwing in the towel and winding up businesses while the decision is still theirs.

As one might expect, it’s important to look behind the figures: insolvencies were still higher than before the Covid-19 pandemic; in addition, the number of court-ordered compulsory liquidations was 183 in April, almost double the 94 liquidations a year earlier. There is no doubt that the business environment is still extremely tough and the high costs of operating show very few signs of easing. Wage demands are being supported by the ongoing cost of living crisis and inflation of 10.2% in Q1. The base bank rate, at 4.5%, is at its highest level since 2008. This rate is not necessarily reflected in the borrowing costs of many enterprises which have enjoyed lower fixed rates, possibly for many years.

Individuals operating close to the financial edge may face the same fate. Again, the latest statistics don’t give the full picture: there were 531 bankruptcies in April, five per cent lower than last year and less than half pre-2020 levels; Individual Voluntary Arrangements (IVAs) registered per month in the three-month period ending April 2023 were 16% lower at 6,336 than the three months to April 2022. However, the IVA series is historically volatile as it is based on date of registration at the Insolvency Service. Interest rates, which most commentators expect to rise at least once more, will impact the availability of debt solution options for individuals as the wholesale price of funding these remains high and will be slow to fall when base rates eventually ease.

Expect CVLs to remain at pre-pandemic levels for the foreseeable future, while company compulsory liquidations will continue to be driven by HMRC, after an extended period of Covid-related forbearance.

Directors facing investigations

Unlike John Lennon, the Insolvency Service doesn’t seem to believe in ‘Instant Karma’ when it comes to taking action against errant company directors. It will, however, always get round to lifting the lid on bosses of failed companies, sometimes just when they think they might have escaped scrutiny.

A new study by commercial law firm Reynolds Porter Chamberlain (RPC) has found that investigations into directors of insolvent companies are rising sharply, with 36% more cases recorded in 2022 compared to the past year: an increase from a monthly average of 142 per month in 2021 to 193 in 2022.

More than three years after the government’s Bounce Back Loan (BBL) Scheme was rolled out to save small businesses at risk from pandemic lockdowns, closer scrutiny of businesses now unable to repay the loans is bringing an increasing number of directors to book for abusing the system. The Insolvency Service is now wasting no time launching official investigations into those voluntarily dissolving companies  (outside a Creditors’ Voluntary Liquidation) with outstanding BBLs.  In theory there is no ‘comeback’ on Directors whose businesses default on BBLs: their personal assets are safe since the loans are unsecured and involve no personal guarantees. The debt is written off once the company is liquidated, so liability doesn’t transfer, provided Directors have complied with their statutory duties.

Government investigators and appointed Liquidators will pick apart a company’s financial record in the run-up to insolvency. There are countless examples of questionable payments and enrichment on the back of BBLs, with some extreme cases well documented. Improper use of these lifelines will almost certainly make Directors personally liable for this outstanding debt.

RPC suggests that the Insolvency Service’s tighter grip is on directors is revealing wider fraud issues beyond government loam abuse The number of cases sent to the service’s compliance and targeting department more than doubled in the same period, from an average of 528 to 1,077 per month. More than 450 directors were disqualified. The firm says that with investigators clearly on the warpath, Director & Officer’s (D&O) insurance claims are likely to show a marked uptick from those seeking to cover the costs of investigations and penalties.

 

 

Interim workers

Non-permanent or interim staff at all levels may present a solution to one of the largest cost concerns for UK businesses, especially SMEs. Official figures show that the number of pay rolled employees fell by 136,000 in Q1, but overall employment rose by 0.2 per cent. The economy is turning to the interim market for all aspects of labour, from large special projects such as transformation and restructuring, to isolated skills gaps.

Of course, there is a wider picture to consider. Post-Covid, there are still millions of economically inactive Britons who are not part of the workforce either because they are students, have retired or are suffering from long-term illness. Work patterns and career priorities have been changed by Covid’s disruption to ‘normal’ working life. Retaining and recruiting permanent skilled staff is increasingly challenging and, regardless of motivations cited by employees, financial incentives remain the strongest tools for attracting talent and slowing staff turnover.

The main alternative is attempting to recruit from a wider pool. This applies not only to executive and skilled positions, but to the less skilled end of the workforce, where relatively cheap permanent labour is no longer readily available. Both these tightening factors in the labour market have added to a wage spiral and have been compounded by the effects of Brexit on labour supply at all levels. The potential for valuable working capital to be impacted adversely by recruitment issues is very real.

Whether hiring interim, casual, freelance, agency staff or consultants, SMEs must be aware of all relevant tax and legal issues for flexible employment. While the prospect of short term cost savings may appear very appealing, particularly while interim rates remain competitive, the potential for incorrect compliance and lack of business continuity may lead managers to review staffing needs more carefully. Businesses should take appropriate professional advice on navigating this maze and its effects on cashflow to help optimise the benefits of flexible labour.

 

Fixing business energy payments

Soaring energy costs have pushed several businesses close to the brink in the past 12 months, particularly small enterprises in the retail, hospitality and food manufacturing sectors. Taken at face value, there appears to be good news: the price spike which followed the beginning of the war in Ukraine has now receded and wholesale prices of both gas and oil have fallen dramatically to less than a third of their levels in August 2022. The government is still helping too, in that the energy bill relief scheme has been extended until April 2024, even though wholesale energy prices are expected to fall further in the second half of 2023.

Firms that use energy brokers, however, are being told that business energy prices are likely to will keep rising for at least another two years; for those with contracts ending soon, many intermediaries are said to be recommending new fixed terms of up to three years. The argument is that much like mortgage rates, while prices are hiked very quickly, they tend to fall much more slowly than the underlying costs. Suppliers hedging forward are usually to blame. At present, new fixed contracts are offering price per unit of around 50% higher than soon-to-end deals that pre-dated last year’s spike. These new figures have already dropped substantially from more than 400% higher last year.

The only certainty is that intermediaries will be keen to take a commission. The ability to forecast accurately while geopolitical turmoil remains is very limited. A protracted Ukraine war, compounded by a new flashpoint in the Middle East could prompt a new spike. Fixing for peace of mind makes sense for businesses that can’t afford any more shocks; a new contract for more than 12 months, however, seems risky.

As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.

Our helplines below are open for free initial consultations.  

Jo Milner                                07990 816904

David Buchler                       07836 777748

Let’s get to work!

 

About Buchler Phillips

Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.

Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.

The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms

Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals. 

This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.

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