News
Why corporate insolvencies could be the shot in the arm the UK needs
David Griffiths explores the role insolvency plays in a healthy functioning economy
I admit that the title of this article may involve you doing a double-take. Of course corporate insolvencies are a bad thing. Nobody wants a company to fail, with the associated job losses and overall negative impact on that companyes stakeholders. This is, of course, correct which is why the survival of a business is always goal number one for an insolvency practitioner.
However, if we are looking at the economy as a whole, it is not so clear cut.
If the survival of every company were always a good thing, then there would be no need for insolvencies. No creditor would ever take enforcement action against a debtor because this could lead to an insolvency which would be a bad thing, wouldnt it? HMRC could simply ignore the fact that companies were not paying their taxes, because they wouldnt want to do anything that could lead to their demise. Does it matter that the debtor company would continue trading and racking up larger and larger debts? It would at least mean that the company continues.
When we look at it from this slightly different perspective, then it is quite obvious that it would lead to a kind of corporate wild west. Insolvencies, whilst painful for those directly connected to them, are an essential part of a functioning economy and in the current climate, might just help the economy get back on its feet.
If we look back at what has happened since the pandemic started, insolvencies were largely cancelled. Companies were given grants, payment holidays, cheap unsecured loans, furlough payments, and protection from enforcement action by creditors.
Landlords could not easily remove non-paying tenants, and HMRC in most cases had to simply watch as some of the more unscrupulous took advantage of the money on offer and the legal protections in place.
Fast forward a couple of years or so, with all those incentives for continuity removed, and we find ourselves in a position where corporate insolvencies are nearing record levels. Underperforming companies which would have failed in any event but for the pandemic, have found that the protections were just a stay of execution. They did not go away. While some companies are undoubtedly failing because of the impacts of Covid and the war in Ukraine, the high numbers we are currently seeing are likely to be the result of a kind of insolvency catch-up. The average insolvency levels over the last three years remain low, suggesting that this insolvency correction is likely to run for a while yet.
I would suggest that the governmentes approach at the outset of the pandemic was the right one. It was far from perfect, but given the urgency at the time, it was the best option available. To have left companies to fend for themselves in those conditions would have been catastrophic, and would have led to unprecedented numbers of insolvencies not just those that were unviable beforehand, but those that were otherwise high-growth, high-performing companies. The damage to the economy would have been irreversible.
‚
I mention the pandemic because it offers us a glimpse at what would happen in a world where insolvencies were largely cancelled. It has led to a backlog of insolvencies, and an increase in the amounts owed to HMRC and other creditors. In the case of the latter, unpaid debts are more likely to lead to a domino effect where bad debts trigger distress through the supply chain. Companies which were unviable before the pandemic, have remained alive, albeit on life-support. These so-called zombie companies have played their part in sucking the life out of the economy because they are zero-growth entities, employing staff who would be better employed at growing companies, accruing tax and other liabilities which will never be paid, and undercutting stronger companies largely because of this non-payment. It is relatively easy to undercut the competition when you do not pay your taxes and other costs. Unfortunately, this is bad news for their competition, who are playing by different rules.
Yes, insolvencies are a bad thing on an individual level, but the alternative is far worse.
Whether or not we have the two consecutive quarters of negative growth required for a recession, it is evident that these are tough economic times. We have already had one quarter of negative growth (Q3), but may just about avoid the same fate in Q4.
Notwithstanding this, as a country we need to return to significant growth as soon as possible, and I would argue that the insolvency regime is an important part of this process.
As struggling companies fail, it could have a positive impact on their remaining competitors. They will no longer be competing with companies who undercut them for the reasons stated above, and with the resultant redundancies, will have access to a larger pool of employees - following a period where they have struggled to recruit. A more buoyant labour market may lead to a reduction in wage demands, which in turn could contribute towards the fight against inflation which is having such a profoundly damaging impact on all of us right now in terms of the cost of living, but which is also fuelling the latest pandemic strikes.
As we go forward, insolvency practitioners will be called upon to deal with a large number of liquidations the terminal insolvencies which are driving the high numbers we are seeing at the moment. However, they will also be a key part of assisting struggling, yet viable, companies that are trying to weather the current storm.
Adapting to the new realities are essential, and it is more important than ever that directors take advice early to ensure that they can meet the challenges head on, and take advantage of the opportunities available.
Feedback Form
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Donec ultricies consequat.
News and insights
Get in touch
with Leonard Curtis
Forward
with purpose
Reach Commercial Finance Limited. Registered in England no 09056450. Leonard Curtis is a trading style of Reach Commercial Finance Limited. Leonard Curtis is a broker not a lender and is independent with access to the whole of market. We may receive commissions that will vary depending on the lender, product or other permissible factors. The nature of any commission model will be confirmed to you before you proceed. Authorised and regulated by the Financial Conduct Authority FCA no. 753686. Registered with the Information Commissioner’s Office reference ZA069234
Leonard Curtis Legal Limited is a limited company, registered in England and Wales with registered number 09820186. Registered office: Riverside House, Irwell Street, Manchester M3 5EN. Leonard Curtis Legal Limited is registered with the Solicitors Regulation Authority with number 626004.