The ticking timebomb of energy price related insolvencies has almost certainly been brought forward by the government’s decision to withdraw energy bill support. The existing scheme for businesses will be cut dramatically from April, piling on the woe for UK enterprises already struggling with higher energy costs than competitor firms in Europe.
Seemingly focused on the ‘Ukraine effect’ behind the surge in energy costs, the new scheme will offer a discount on wholesale prices, instead of a price cap. The problem is that while wholesale gas prices are now lower than before Russia’s invasion in Q1 2022, they are still multiples of average prices before 2021.
Little will be done by the government to overhaul long term energy policy in time to stop cost pushing businesses over the edge. It is, however, better placed to help their cashflow beyond energy bills by clamping down on late payments for SMEs, so a good deal is riding on a new official review of this existential issue. Pay UK estimates that more than £23.4 billion is currently owed to UK businesses, with SMEs believed to be waiting for, on average, nine outstanding payments at any one time.
During the Covid pandemic, ministers urged large businesses to pay small suppliers promptly, the expectation being within 30 days. While the right to charge interest on late payments has been supported in law for many years, it is rarely exercised by smaller businesses reluctant to ‘rock the boat’ with important customers. The Business Secretary has rightly dubbed late payment an “exploitative practice”. The review needs to spell this out for debtors in no uncertain terms.
Time, please; drink up
The hospitality industry is a high profile casualty of rising costs, squeezed in a vice-like grip between energy prices and a cost-of-living crisis clobbering consumers. The UK’s pubs are possibly in the frontline: already struggling to maintain relevance pre-Covid, they have spent chunks of the last three years shut by restrictions, closing early to avoid heating empty bars and battling higher wholesale prices of drinks. Those which have pivoted successfully to become mainly restaurants now face food price inflation, while traditional boozers have their work cut out convincing drinkers to venture out for the privilege of paying many times more per pint than they might in a supermarket.
Energy costs alone for an average-sized pub serving bar food have rocketed from around £2,000 a month to £8,000. Cutting casual staff, reducing kitchen hours and opening for fewer days during the winter are all common at present. Close to 7,000 hospitality businesses – pubs, cafes and restaurants – have entered into insolvency since. More will head that way this year, perhaps opting for a Creditors Voluntary Liquidation (CVL) to retain some control over folding their businesses. Others, however, may be determined to tough it out, in which case it is worth exploring with advisers some more radical measures beyond merely cost savings and efficiencies: property leases and turnover based rents; hospitality industry-specific aspects of tax, VAT, PAYE and possible negotiations with HMRC; asset reviews; and leasing or financing options for equipment.
Care homes walk a tightrope to growth
The long term outlook for the care home sector is, in theory, encouraging: steady growth of 1% year-on-year, for as far as analysts can forecast, is based on an ageing population globally combined with increasing income levels and faster growth in specific conditions requiring care, notably dementia. In the UK, a relatively high 82% of care homes are privately operated, some in large chains typically owned by private equity, while a large proportion remains fragmented among small, independent outfits. For all of these homes, the short-to-medium term outlook is troubled by more than their already challenging energy costs. Tighter regulation and monitoring, higher staff costs supported by the National Living Wage and a fall in immigration from countries previously plugging a large gap for care workers have all conspired to slash profitability.
Operators running a very small number of homes – maybe even just one – are particularly exposed. They don’t have access to a large corporate balance sheet, nor to further funds secured on their property, particularly while interest rates continue to creep up. It’s no surprise that the Insolvency Service’s most recent review of care home closures, in November 2022, showed a 400% rise in compulsory liquidations over the previous year to November 2021.
As ever, the insolvency toolkit offers options for care home operators seeking to grip their problems and steady their businesses. A Creditors Voluntary Arrangement (CVA) may buy some breathing space while management considers large, specific issues such as landlord negotiations when the main trading property is leased. If liquidation and closure is the answer, then a CVL may be pursued by the directors, although professional help is crucial in managing the process: winding down a care home business is hugely complex, given the number of stakeholders involved – not least the residents, many of whom may be in very poor health.
There are presently 3.2 million people in the UK aged 80 or older. The figure is expected to grow four-fold by 2041. Care homes are clearly becoming an increasingly important sector but the scale of fallout in tough times will grow accordingly while the financial profiles of such businesses remain in their present form.
Government loans bounce back on Directors
Almost 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.
Media reports of Director disqualifications since the turn of the year suggest that the Insolvency Service is 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.
The Insolvency Service 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 egregious cases well documented. Improper use of these lifelines will almost certainly make Directors personally liable for this outstanding debt.
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
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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.