Fall in failures
Insolvencies halve but fears rise of ‘zombie’ firms
Insolvencies have fallen because of government support
Corporate failures across the UK more than halved during the first six months of 2021, as government COVID-19 support measures helped businesses trade their way through the pandemic.
However, this support may also be propping up so-called “zombie” companies who would otherwise struggle to survive, according to an insolvency specialist.
Analysis of notices in The Gazette by Interpath Advisory reveals that 301 companies fell into administration or receivership from January to June 2021 – a sharp fall on the 655 in the first half of 2020 and 686 in the corresponding period in 2019.
May and June saw this year saw particularly low levels of administrations and receiverships – only 32 companies filed for insolvency in each month, the lowest monthly total since Interpath first started tracking data in 2005.
Blair Nimmo: ‘I don’t think we will see the deluge of corporate failures‘
The Gazette revealed 18 Scottish companies fell into administration or receivership between January and June – down from 37 in the first half of 2020 and 39 in the opening six months of 2019.
The analysis follows publication of new figures from HM Treasury which reveal that nearly £80bn of emergency government-backed loans were received by UK businesses during the COVID crisis.
Blair Nimmo, chief executive of Interpath Advisory, commented: “The dichotomy of having historically-low insolvency rates at a time of significant economic crisis is naturally prompting concern in some quarters that the taxpayer is propping up an army of zombie companies.
“But while it is fair to say that insolvencies are being supressed artificially thanks to the raft of support available, we also know there are lots of good businesses out there whose balance sheets are broken solely due to the impact of the pandemic – so it is only right they continue to be given the time and the support to be able to build their way back out of the crisis.”
Mr Nimmo continued: “Enormous credit must be given to business leaders who on the whole have navigated their businesses well during one of the most challenging periods in corporate history.
“Nevertheless, with some of the COVID support measures, including the Job Retention Scheme now starting to unwind, it would be easy to assume that we have reached the bottom of the cycle and that insolvency levels will start creeping back up again during the second part of the year.
“This may well be the case, albeit I’m personally not so sure cases will escalate rapidly – all stakeholders, including banks and HMRC, continue to be pragmatic in their approach to companies experiencing difficulties as a consequence of the pandemic and there is lots of cash available from investors ready and waiting to be deployed.
“So while insolvency practitioners will inevitably get busier, I don’t think we will see the deluge of corporate failures that many have predicted.”
For many organisations, the knotty issue of how and when to repay COVID-related liabilities and how this will affect the road to recovery is being exacerbated by raw material and labour shortages, as well as rising inflation.
Mr Nimmo said: “As we exit lockdown, organisations – particularly those in those hardest hit sectors such as leisure, hospitality, travel and retail – are firmly in recovery mode.
“They will be asking themselves a number of questions. What does this ‘new normal’ mean for our business model? What does it mean for our balance sheet? And as we start to scale our business back up again, what does this mean for our funding? Maintaining a tight grip on cash and working capital will never have been more important.
“The more forward-thinking organisations will also start to undertake options reviews as they crystallise their thinking on what the new trading environment means for them.
“However, the road to recovery will not be easy. Issues such as labour and raw material shortages and rising costs continue to weigh heavily on many. Pricing contracts against this backdrop is extremely tricky.
“In the short term, increased demand from consumers as restrictions lift may allow businesses to raise prices before the effect of higher input costs are felt. This could provide a much needed boost in profits and cashflow.”