R3 Midlands issued an article this week through Insolvency Insider warning that over the next twelve months there would be a shift from business restructuring to formal insolvency.
EWS have an alternative view on this and we have included our thoughts towards the end of the R3 article.
R3 Midlands Article.
R3 Midlands warns of shift from business restructuring to formal insolvency over the next twelve months
This is according to research from insolvency and restructuring trade body R3, which indicates that its members believe they will see a shift from informal corporate restructuring to formal insolvency procedures between this summer and next spring.
R3 asked members who work in corporate insolvency and restructuring which tool they thought they would be most likely to recommend over the next month. Over two-in-five (44.4%) said they expected to recommend restructuring, with 26.5% predicting they would most commonly recommend financial restructuring and 18% operational restructuring.
Of the formal corporate insolvency options, fewer than one-in-five (19.1%) said they expected the most-recommended tool over the next month to be a Creditors’ Voluntary Liquidation (CVL), 14.3% said administration, and just 4.2% said a Company Voluntary Arrangement (CVA).
Within the next year, however, over a third (37%) said they expected a CVL to be the most commonly recommended tool, while around a third (34.9%) said they expected it to be a formal administration procedure, and 16.4% said a CVA. Only 7.4% expected financial restructuring to be the most commonly recommended procedure in 12 months’ time, and just 1.1% said the same about operational restructuring.
R3 Midlands Chair Eddie Williams, a partner at Grant Thornton in the East Midlands, said: “Our members anticipate demand for our support to shift from restructuring work towards more traditional insolvency processes over the next twelve months.
“This means that, over the short term, our input is likely to focus on providing turnaround support for business rescue. In the mid to long term, however, the balance will switch to supporting businesses through more formal restructuring or insolvency procedures.
“Some businesses may still have a prospect of rescue through administration, while others may not and will be wound-up through a liquidation. The question is how this balance between rescue and winding-up will play out over the coming months.”
The R3 survey also asked members about the effectiveness of Government measures to support businesses through the pandemic. Seven in ten (70.5%) named the Job Retention Scheme as “very effective”, nearly half (45.9%) said tax payment deferrals, and more than a third (35%) named the business rates holidays.
Eddie Williams continued: “Employee costs are usually the largest expense for a business. The Government’s Job Retention Scheme has lifted much of this obligation from the companies which took part, while tax payment deferrals have also helped manage a sizeable expense and a common trigger for corporate insolvencies. Such cash flow support has enabled business supply chains to continue to function in some way during the pandemic. The new tools aimed to promote business rescue, introduced in the Corporate Insolvency and Governance Act, should also enhance the rescue prospects for many struggling companies.
“Inevitably, however, there will be some businesses who are, or will be, concerned about their financial health. R3’s advice is not to hold back – talk to a qualified professional as soon as difficulties arise. Doing so will afford the best chance of recovery and will greatly improve the options for business rescue.”
The partners at EWS don’t wish to appear contrary to the general views of their profession but they have noticed that many of the creditor community are actually being more supportive than before COVID because they appreciate that “we’re all in this together” and that the problems being suffered by their defaulting customers are not due to mismanagement but are the result of factors totally beyond their control.
In this sort of climate, it can actually be easier to put together a financial restructuring plan because the crucial element of trust between debtor and creditors has not been destroyed.
Our view is that, as long as the Government wants to avoid an avalanche of insolvencies and directs HMRC to adopt a flexible attitude, there are real prospects for viable businesses to put together a turnaround plan that doesn’t involve a formal insolvency process.
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