Are we heading for an economic cliff?

How prepared are you for when the COVID-19 related financial support and other interim measures fall away?

To deal with the financial impact of coronavirus the Government laid down what was to become the Corporate Insolvency & Governance Act 2020 (“CIGA”), which became law in June 2020 and had retrospective effect to March 2020. CIGA was seen as a balancing act between the detrimental impact the severe restrictions would have for trading on one hand against shielding business from depleted cash flow on the other.

In January 2021, the House of Lords debated over the continued restrictions on creditor enforcement imposed by CIGA. These restrictions were intended to expire on 30 September 2020 but were extended to 31 December and subsequently 31 March 2021. At pretty much the eleventh hour following a budget completely silent on this area, the deadline was extended in late March to the end of June 2021. In general, the restrictions prevented the service of statutory demands/winding up petitions, landlord enforcement and suspended wrongful trading provisions. As a result of these restrictions, the latest data suggests an unprecedented level of debt has accrued, including over £4.5 billion in rent arrears. 

Furthermore, there is an estimated £70 billion of Government-backed lending, together with deferred tax liabilities, which is most likely going to make HM Revenue & Customs (“HMRC”) a major creditor in most insolvencies, resulting in them having significant influence on the destiny of businesses. This influence is made all the greater following the recent upgrading of HMRC to secondary preferential status when formal insolvency is required. In short, this means HMRC are virtually first in the queue and this will result in all likelihood unsecured creditors (including all general trade creditors) receiving no or a minimal return in most insolvencies.

So, is there any good news I hear you ask? As I sit writing this article on the afternoon on April 12th, non-essential retail is open and there were queues this morning at pubs, hairdressers and Primark with consumers eager to spend and return to normal. Hopefully for businesses who have been closed for a considerable portion of the last twelve months, these early signs of trade will continue.

Furthermore, the Government have announced an easing of bounce back loan repayments in an effort to ease cash flow demands. This is welcome news as my concern is many businesses will have taken these loans when they were first launched at a time when COVID-19 would “be over by Christmas” and none of us had heard of the Kent strain – i.e. the business would have several months to recover before the first payment was due or the loan was taken as an insurance policy which was going to be repaid in full with no consideration given to affording the extra monthly repayment should the situation arise. The second and third lockdowns put pay to that and with repayments becoming due, many businesses will not welcome the extra payment now due. Therefore, hopefully the extra breathing space will enable the recovery to match the repayment schedule.

In addition, recognising the resulting position of HMRC and the detrimental effect COVID-19 has caused generally, the House of Lords have stressed HMRC need to be co-operative and engaging with a supportive approach on proposed COVID-19 affected corporate restructuring. Clearly, time will tell on this recommendation and it has certainly not been a strength of HMRC in the past! I would also say this commercial understanding needs to be widened to include landlords and credit controllers who are all seeking recoveries and racing to be first in line for repayment.

I asked in the title whether we are heading towards an economic cliff. Personally, I would suggest “normal” (whatever that is) will not occur overnight. So, rather than a cliff as COVID-19 restrictions continue to (hopefully!) ease off, maybe the economy will experience a gradual slope.

Whatever the outcome businesses need to be proactive. Review your cash flow and look at ways of reducing overheads, particularly while your turnover gradually starts to return to pre-lockdown levels. You should engage with your creditors and for those who are owed money, a commercial understanding and forbearance is going to be the order of the day. If all fails, the advice has to be to seek early advice. It is no coincidence those who do seek early advice find they have more options available than those who leave it until the last minute. As a scout will say, “Be prepared” or as Benjamin Franklin said, “By failing to prepare, you are preparing to fail”.

Jaime Cochrane
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Jaime Cochrane

PBC is a specialist business rescue and insolvency practice that provides practical, helpful advice and solutions to a variety of businesses and individuals with financial problems. We know that dealing with these issues can be difficult and very stressful. Our approach is friendly, professional and effective and is based on a proven history of dealing successfully with businesses and individuals. This has resulted in us becoming a trusted and respected firm in the business community.