The corporate insolvency statistics for Q2 2022 paint a worrying picture for UK businesses. With inflation at a 40-year high, fuelled by soaring gas and electricity bills, food prices and wage increases, the cost of living crisis is taking hold across the economy.
In the second quarter of this year, company insolvencies were up 13% on the first quarter, and 81% higher than in the same period last year. Continuing a recent trend, creditors’ voluntary liquidations (CVLs) remain the most common company insolvency procedure, with the highest number of CVLs since 1960 (when records began).
Interestingly, despite historically low levels of administrations since the pandemic, business rescue now appears to be back on the agenda, with an increase of 95% in company administrations from Q2 2021 (and up 18% from the previous quarter).
But one insolvency process that seems to have fallen out of favour is the company voluntary arrangement (CVA) – there were just 32 registered CVAs in Q2 2022, lagging significantly behind other forms of company insolvency procedure.
The CVA – here to stay?
Up to a few years ago, the humble CVA was the insolvency procedure of choice for many businesses, particularly those in the retail and casual dining sectors. Debenhams, Pizza Hut, House of Fraser and others arguably gave CVAs a bad press because of the criticism they attracted for their treatment of landlords.
However, the Covid-19 pandemic saw the government introduce measures to protect commercial tenants, including a moratorium on landlord enforcement action for unpaid rent. Consequently, the need to compromise landlord debts via a CVA largely subsided.
Even now, landlords are prevented from pursuing commercial tenants for residual rent debt relating to the period of mandatory business closures during lockdown under the Commercial Rent (Coronavirus) Act 2022.
This legislation is intended to encourage landlords and tenants to agree a compromise for outstanding arrears and avoid the widescale failure of otherwise viable businesses. The referral period under the scheme is due to end on 23 September 2022, so the impact on future insolvency figures is yet to be felt.
Another potential nail in the coffin for the CVA has been the re-introduction of Crown preference (granting secondary preferential status to HMRC for certain tax debts, such as VAT and National Insurance). Arguably this makes it more difficult for businesses to launch CVAs, as once preferential creditors are paid in full there may not be much left in the pot to entice unsecured creditors to support a CVA.
But the CVA still has much to commend it. It allows companies to compromise unsecured debts out of court (unlike the restructuring plan mentioned below) where bilateral creditor negotiations fail, as well as the opportunity for management to remain in control.
While the new Part 26A restructuring plan enables businesses to bind certain classes of dissenting creditors to a restructuring, it has only been successfully implemented by one SME so far (Houst Ltd) and is widely regarded as too expensive for many SMEs.
The CVA got a bad name for itself pre-pandemic following its widespread use by large retailers and casual diners. Arguably it was never designed for restructurings of that size, and for the SME it can remain a viable restructuring option. For this reason, we anticipate that as with other forms of insolvency, there will be an uptick in CVA usage in the coming months.
Weathering the storm
It is critical in times of financial trouble for businesses to keep a close eye on cash flow to spot any difficulties. Engaging with creditors and other stakeholders at an early stage (such as suppliers, landlords or lenders) can be the difference between business rescue and failure.
While we are seeing an increase in HMRC enforcement action, HMRC has historically tended to take action following a ‘failure to engage’ rather than ‘inability to pay’, so an open dialogue regarding historic tax debts is recommended.
Where possible, businesses should review key contracts and take steps pre-emptively – for example, by seeking to agree new payment terms with suppliers, extending maturities on bank loans or re-negotiating rent terms under leases. It is all about proper contingency planning.
A telling fact from the latest insolvency statistics is that while compulsory liquidation, administration and CVA numbers were up on last quarter, the numbers are still behind pre-pandemic levels. This indicates that – at least for the moment – there is still a degree of forbearance on the part of lenders, or perhaps some businesses are holding out better than expected.
Whatever the reason, the omens are not great for the wider economy right now, so businesses which are experiencing the first signs of trouble should make sure they get their ducks in order now ahead of what promises to be a challenging winter.
This piece was originally published by Accountancy Daily and can be found here.