Industry at odds over potential insolvencies

The coronavirus crisis is likely to directly force between 70,000 and 100,000 companies into insolvency, according to Gareth Harris, partner at RSM Restructuring Advisory, while R3, the trade body, suggests that figure could grow substantially over a longer period of time.

Harris says there is likely to be two “spikes” in insolvencies over the course of the crisis, while the figure of 800,000 insolvencies reported by the BBC needs some rethinking.

That figure does not include companies with underlying problems for whom the crisis will simply accelerate their demise, of which there are likely to be a further 100,000 he says.

“[In the 2008 financial crisis] there were 114,000 corporate insolvencies. Now that was as bad a recession as we’ve had in living memory since the 1930s and it was 114,000. Which is why the 800,000 just needs a bit of context putting around it. 800,000 would be a phenomenal number.

“We are not going to see anything more than between 70,000 and 100,000 insolvencies as a direct result of this. The big caveat around that is that it does depend on how long it lasts and how steep it is. I think we are going to see probably the steepest fall into a recession since the 1930s. That is quite likely,” Harris says.

However, Duncan Swift, president of insolvency trade body, R3 says that while 100,000 corporate insolvencies is in the right ballpark, 800,000 isn’t necessarily wrong and like Harris, says it depends how severe the crisis will be.

“Whether it’s 100,000 or 800,000 – they’re big numbers,” Swift says. “Yes, it’s going to be in that order of magnitude. But it really depends upon just how long this thing goes on for. If, as was initially suggested at the start, it might be a matter of a few weeks then I suspect 100,000 is an overestimate because of the tools that the government has provided and the advice that our members are providing to corporates.

“But the longer the stall goes on, the more difficult it is and the more remedial the solutions will have to be to cope,” he adds.

Harris says the first spike of insolvencies is imminent, where those companies with underlying problems can’t cope with the crisis and on this point, Swift agrees.

“I think it’s fair to say that the insolvency events we have seen thus far have tended, the vast majority of them, to have been of companies that had impaired debt situations long before this crisis came along,” Swift says.

The work of the UK government so far to alleviate pressure on businesses means the number of insolvencies will subside for a while before rising again as the support available disappears, says Harris. That crucial time could be towards the end of the year.

“The most likely time for this [second spike] then would be sometime around November. And the reason for that is because a lot of the deferment that has been put in place is in relation to HMRC debt and HMRC take preferential status over that debt from the December 1.

“All these government measures will have to fall away at some point in time, and this debt has to start to be repaid,” Harris adds, and that will be the moment the second spike hits and mass corporate insolvencies will rise again.