There may be more trouble ahead... says Tyrone Courtman 
Added : 6th November 2009
Tyrone Courtman
The general consensus among turnaround specialists and insolvency practitioners in the midlands is that business is a little quieter than you might expect given the depth and intensity of the current recession.
There are several possible explanations behind the lower than expected insolvency numbers: the first one being that Corporates’ are restructuring both operationally and financially in order to cut costs and borrowings so as to be able to ride out the recession. Second, the government’s tax deferment scheme is working, though there is a controversial debate brewing as to whether these agreements are simply storing up significant debt problems for already financially stretched businesses. Third, interest rates are at an all time low and are likely to remain so for some time yet and arguably the government has placed pressure on the banking community to retain existing, and extend new lending, facilities to business customers.
A recent survey from the Association of Business Recovery Professionals, R3, reveals that 95% of its membership fears that the full impact of the recession has yet to be translated into insolvency statistics. These concerns are borne out of the early 1990’s experience, when corporate failures peaked some three years after the recession had started.
The duration of HM Revenue and Customs (‘HMRC’) time to pay arrangements will not be indefinite and many businesses could find themselves facing the fresh risk of insolvency once they have come to an end. Time to pay arrangements have been extended to more than 168,000 businesses and amounts to around £30billion. 12 months on and Tyrone Courtman, Head of Business Recovery and Insolvency at Regional Business Advisers, Cooper Parry predicts that it is only a matter of time before these arrangements conclude and that all good things must come to an end.
"The Treasury’s tax take is down significantly and HMRC is going to have to start collecting soon to enable the government to continue to finance UK Plc” He added “There has clearly been a hardening of HMRC’s attitude recently and we are beginning to see an end to some of these deferment schemes. This will precipitate a number of business failures which will subsequently force the hands of the banks because they will not want to allow an insolvent liquidation to destroy enterprise value and prejudice their security. The government’s actions were well intended, but many businesses simply will not have addressed their underlying financial difficulties."
The potential for a conservative government next year will only add to the speed with which government schemes are withdrawn as David Cameron looks to get the public debt burden under control. The new government will have some huge bills to pay and depleted revenues with which to do so as less tax is being paid by the companies which go bust.
"I do not see interest rates being a problem for business in the short term as the Bank of England will be forced to keep interest rates low. Cash has continued to be cheap, which combined with capital repayment holidays of the debt to the bank, has enabled many businesses to survive. But in the medium term inflation is likely return forcing the MPC to impose higher rates, so just when businesses think that they are over the worst, higher rates will render many incapable of servicing their loans."
Despite the stormy outlook, Courtman was upbeat about many businesses that may be teetering on the brink of insolvency, as there are many ways to bring a business back to health without recourse to a formal insolvency process.
As finance still remains difficult to secure, the best and most immediately effective way of doing this is to address cash management. He added "Directors have a very difficult balancing exercise to juggle to ensure that they act in the best interests of the business and its stakeholders. Securing the right advice is crucial."
The good news is that new financing solutions are emerging, that can help otherwise tricky situations. They include debt for equity swaps, asset-based lending, accelerated asset disposals, debt buy-backs and/or new money from shareholders. Innovation is more crucial than ever because the old and tested ways of doing things simply do not work anymore.
Increasingly the Company Voluntary Arrangement (CVA) procedure is being adopted by many as a way to avoid the costly process of a formal insolvency. The process aims to enable Corporates’ to do a deal with their creditors whereby in return for a repayment of some or all of their debts over a period of time, the balance is written off. The CVA provides the business with a breathing space necessary to enable management to effect different strategies; open up a new market for their products, cut costs and overheads or to simply negotiate with creditors and landlords, for example.
The process is becoming increasingly popular with creditors, as they see that keeping the company as a going concern is the best way of getting paid, better than the risk of getting little or nothing from a liquidation process. It is also, arguably, a more acceptable alternative to a pre-packaged disposal of the company’s business and assets, a practice which has attracted much adverse press recently, in respect of the negative perceptions surrounding the way in which existing management can often buy the failed businesses assets back at a knock down price, leaving the liabilities behind.
There is still much debate as to whether we shall see a double-dip recession, despite the talk of green shoots and recovery. Tyrone says "It certainly feels much more positive than it did this time last year. I would liken the current situation to a free-fall parachute jump. We are out of the free-fall, the parachute has opened, but we are still going down and we are yet to establish what the new landscape will look like and whether we are in for a heavy landing. I hope not."
"But the scale of the problem this time is huge. Factor in the cuts that will inevitably need to be made to public spending, the increases so far announced to taxation (and I suspect there may still be more to come. Vat to 20% perhaps?), and it is not difficult to imagine that this fiscal drag will have a more damaging effect. And when the upturn does come, who is going to be in a position to finance it? Our major clearing banks will still be nursing their capital bases back to health. A double –dip recession possibly not, but an extended period of austerity, certainly."
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