The End of the Party: The Middletons, COVID, and Corporate Death

One doesn't have to be a specialist in economic matters to recognise that the UK is experiencing rather severe pressures at the moment.

Last week's decision by the Bank of England's Monetary Policy Committee (MPC) to raise interest rates to their highest level for almost 15 years has only made the financial waters in which both consumers and businesses find themselves even more turbulent than they had been (https://www.thetimes.co.uk/article/28ff27ca-105e-11ee-a92d-cf7c831c99b5?shareToken=e5b5dba1488d0afea4e7aac1eceecd30).

Although dire forecasts of the likely effects of the latest rate hike were instantaneous, the full consequences may not actually be known for some time.

Nevertheless, there are already plenty of indications showing how severe things are right now.

One eye-opening report comes directly from the Insolvency Service and illustrates the extent of company distress as of last month (https://www.gov.uk/government/statistics/monthly-insolvency-statistics-may-2023/commentary-monthly-insolvency-statistics-may-2023).

It makes for pretty grim reading.

The number of company insolvencies during May was 40 per cent higher on the equivalent figure during the same month last year.

This May saw 2,181 Creditors’ Voluntary Liquidations (CVLs) in all - up 38 per cent on the same period 12 months earlier - while compulsory liquidations and administrations rose by 34 per cent and 80 per cent respectively.

Yet it's important to remember that the tally recorded in May was not accounted for by lots of businesses suddenly running into circumstances which left them unable to continue.

In fact, some of last month's corporate casualties might have been in trouble before the pandemic and only really sustained by the various Government-backed loans that were put in place to ease the commercial effects of Covid-19.

That argument is supported by a further set of figures made available by the Department for Business and Trade (DBT) a month ago (https://www.gov.uk/government/publications/covid-19-loan-guarantee-schemes-repayment-data/covid-19-loan-guarantee-schemes-performance-data-as-at-31-march-2023).

They reveal that just over £3.5 billion of the £77 billion paid out through the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) went to firms which are now in arrears or have defaulted.

As well as the financial help, companies having difficulties during the pandemic were formally given “breathing space” with the passing of the Corporate Insolvency and Governance Act 2020.

Permanent measures were introduced, allowing businesses to pursue a rescue or restructuring plan and a moratorium on creditor action was put in place until the end of March last year.

Even so, the gradual increase of creditors demanding what they were owed once the final lockdown restrictions were removed always made it likely that companies in trouble would be exposed.

It is a situation which has even recently affected Britain's royals. The parents of the Princess of Wales have been criticised in the media over the handling of the demise of their party supplies firm (https://www.thetimes.co.uk/article/bf87d044-06d0-11ee-9bf2-8ca4db35d928?shareToken=9baa90acb0343c0aeb0794b3198a6e72).

Party Pieces had reportedly run up debts of £2.6 million, included a £218,749 Covid loan and sums owed to many smaller suppliers, who were understandably worried about being left out of pocket.

This demonstrates the ripple effect which can be generated when businesses go bust, creating debts which can indeed also be terminal for smaller suppliers.

If we are looking for crumbs of comfort amidst the Insolvency Service numbers, though, I would suggest this.

The rise in Creditors’ Voluntary Liquidations (CVLs) indicates that more and more company directors are looking closely at their cashflow, seizing the initiative to prevent further losses and wanting to explore whether viable elements of their enterprises can be saved, rather than waiting for the end to come and have someone else to pull the plug.

Furthermore, the increase in administrations suggests that there are more companies still capable of being rescued as a going concern rather than simply being shut down.

Of course, all directors should be aware of their duty to make a decision about what to do if they believe that their companies might become insolvent.

A ruling by the Supreme Court last October confirmed that directors have a legal obligation to consider the interests of creditors in such circumstances and provided guidance about when that duty should be applied (https://www.supremecourt.uk/cases/docs/uksc-2019-0046-judgment.pdf).

Failing to fulfill those duties would leave them in danger of being guilty of wrongful trading - something which, in turn, potentially leaves them personally liable for a company's debts.

In my opinion, if there are any doubts about whether a business can continue, it is vital to act immediately that it becomes apparent.

The earlier that directors seek advice from their solicitors, accountants or an insolvency practitioner, the more options they may have to salvage all or part of an enterprise which they may have spent their entire career building up.