As the nation enters into a new phase of tackling Covid, with areas of England divided into three tiers, classified as medium, high or very high alert, the arguments about the best way forward rage on. Scientists call for tighter restrictions, whilst economists warn of the dangers of further lockdowns.
It is a classic no-win situation - do we focus on saving lives or jobs? Either way, the economy is in a perilous state, and the fear is that the government’s financial assistance may be masking the true severity of the situation.
Many economists predict that the true volume of Covid-related insolvencies has yet to be revealed. This is not to say that the Job Retention Scheme (and its successor, the Job Support Scheme) was the wrong thing to do. Without immediate and decisive action, there would have been a tsunami of job losses as a result of lockdown.
So how did the Chancellor step in to prevent job losses - and what problems have simply been delayed?
Supporting the Economy
Back in March, faced with a virulent pandemic and unprecedented disruption to the economy, the last thing the government needed was a raft of insolvencies. At the start of the lockdown, the Chancellor’s Job Retention Scheme (JRS) successfully prevented a wave of redundancies and bankruptcies, largely by paying up to 80% of wages for those unable to work.
A diluted six-month version of the Job Retention Scheme, called the Job Support Scheme (JSS) takes effect from 1st November, designed to protect viable jobs in businesses who are facing lower demand over the winter months due to Covid-19. A company will continue to pay its employee for time worked, but the cost of hours not worked (up to a level) will be split between the employer, the Government and the employee.
On 9th October, Rishi Sunak revealed an expansion of the JSS, where employees who work for UK firms forced to shut by law because of coronavirus restrictions are to get two-thirds of their wages paid for by the government.
There has been a great deal of debate about whether Sunak has gone far enough, with many businesses and individuals falling between the cracks. Not everyone has benefitted, though there is no doubt that the interventions have prevented a cataclysmic collapse in the economy. But what does this mean for insolvencies? Have the government schemes just delayed the inevitable?
What next for insolvencies?
1) Personal Bankruptcies
The problems being stored up in the economy will be felt by both businesses and individuals. Many companies, especially in hospitality and travel industries, are teetering on the edge, but the worries are just as profound on personal levels.
Money worries will be compounded as Christmas draws near, with so many people already maxed out on loans and credit cards.
Ian Defty, Partner at insolvency and restructuring firm CVR Global, told credit-connect.co.uk that: “Unlike previous recessions, I think there will be an alarming rise of personal insolvencies.
“Credit cards will have been covering the financial cracks for some families during the lockdown, but it just isn’t sustainable, and given that the financial demands of Christmas are on the horizon, those with bad levels of debt will want to clear as much as they can beforehand via the bankruptcy route so that the festive season isn’t cancelled altogether.”
The latest Government figures on individual insolvencies were released on 30th July and showed that in England and Wales, individual insolvencies increased by 12% in Q2 2020 when compared with Q1 2020, and by 7% when compared with the same quarter in the previous year.
These are significant increases, but most observers expect even gloomier numbers when the next set of statistics are released at the end of October.
As the festive season approaches, personal insolvency professionals are expected to be in high demand. The advice from Begbies Traynor is: “If you are struggling with personal debts, bankruptcy might be a viable option to help you back on the path to a debt-free future. Although the term ‘bankruptcy’ carries an element of stigma, for many people it is the best way forward for their given circumstances and more appropriate than an IVA or debt management plan.”
2) Business insolvencies
If personal insolvencies are predicted to soar as individuals become unable to cope with household debts, the same applies to businesses.
Economists believe that many businesses are being kept afloat artificially, ie the so-called Zombie companies. Wikipedia defines Zombie companies as “Indebted businesses that, although generating cash, after covering running costs, fixed costs (wages, rates, rent) they only have enough funds to service the interest on their loans, but not the debt itself. As such they generally depend on banks (creditors) for their continued existence, effectively putting them on never-ending life support.”
For these companies the abundance of free Government money has just served to delay the inevitable. However, the fear is that many businesses that are usually viable are also close to collapse. Although there will always be some winners in extreme times (eg pharma businesses and cleaning firms), most businesses have experienced a dramatic loss of earnings. Some have been unable to open at all. Many will not survive.
A study by the BBC Shared Data Unit found that after an initial spike of 4,200 insolvencies in March, the rate of insolvencies in April, May and June showed a DROP of 23% compared to the same period last year. The government intervention was so successful that fewer businesses went bust than last year!
On seeing these figures, Stuart Adam, from the Institute for Fiscal Studies, commented: "Many firms have been tided over during the period of hibernation partly through loans and tax deferrals, but those mean piling up debts that will make it harder for them to carry on in the longer term."
Adam made these comments at the end of July. In October, the expected rush of insolvencies has yet to happen, but no-one is celebrating. Most insolvency professionals I have been speaking to have not seen a large increase in instructions, yet all believe that there will be a surge very soon.
The Chancellor’s schemes have largely kept UK Plc afloat, albeit temporarily. The challenge for the insolvency industry will be to find ways to rescue and restructure the businesses in need of help, so that they survive, not just in this very strange year, but in the long term.
The alternative is too scary to contemplate.
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