Demand for Budget action amid fears corporate insolvencies may double in 2021

Experts are forecasting a jump in corporate insolvencies as the economic fallout from the pandemic intensifies. Picture: Tim Goode/PAExperts are forecasting a jump in corporate insolvencies as the economic fallout from the pandemic intensifies. Picture: Tim Goode/PA
Experts are forecasting a jump in corporate insolvencies as the economic fallout from the pandemic intensifies. Picture: Tim Goode/PA
Corporate insolvencies are set to double in 2021, with experts warning that targeted action is needed in next month’s Budget to avoid further damage.

RSM, the audit, tax and consulting firm, predicts that business failures will double when government support, such as the jobs furlough scheme and bounce back loans, come to an end.

According to the Insolvency Service, there were 12,557 company insolvencies in 2020, down on the 17,225 the previous year. In Scotland, according to the Accountant in Bankruptcy, there were 592 company insolvencies in 2020, down on the 980 the year before.

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The latest UK insolvency statistics, for December 2020, showed the first uptick for 12 months, though corporate insolvencies remain at relatively low levels, highlighting that government support is likely to be masking the extent of business distress in the UK.

RSM also expects to see increased levels of corporate insolvencies, 15-20 per cent higher than previous years, for up to three years once the government lifelines end and UK business ramps back up.

Paul Dounis, restructuring advisory partner at RSM, said: “Whilst the unprecedented government measures were needed to support businesses through the economic shock caused by the Covid-19 pandemic, the measures may not be enough to rescue all businesses.

“In some cases they may only act as an avoidance or delaying measure for zombie businesses, unless other restructuring options are pursued.

“The much lower insolvency statistics in 2020 suggest that there is a level of pent up, or delayed insolvency which is waiting to happen in 2021.

“Creditors have either been prevented from taking action by legislation, or have felt unwilling to enforce during this difficult period. However, as we start to emerge from lockdown and the vaccination programme starts to take effect this may no longer be the case.”

He added: “The dramatic fall in GDP, Brexit complications and the third lockdown has seen predictions of hundreds of thousands of insolvencies. However, the long-term trends, and the history of previous recessions would suggest that a more likely scenario is a spike of insolvencies in 2021, and then a sustained high level for a two to three-year period.”

The firm noted that the pandemic has led to a sharp and significant increase in the level of corporate debt.

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Since March 20 more than 1.5 million UK businesses have borrowed almost £71 billion in government-backed loans. These figures exclude any other commercial loans from funders, HMRC deferred payments, arrears of rent and any build up in trade debts – highlighting the current levels of exposure for many UK businesses, RSM warned.

Dounis said: “Businesses will need more targeted support to help healthy businesses that have faced extraordinary conditions to not only survive; but thrive in 2021. We are calling on the government to implement a measured response when restarting the economy to avoid a cliff edge moment where businesses will be faced with the furlough, VAT deferral and rate schemes all ending, creating an untenable financial pitch point.

“With the current high levels of government expenditure and potential default risk of loans, the Chancellor has a difficult balancing act to manage; but he needs to take the opportunity in the forthcoming Budget to outline a detailed road map, so businesses can start to prepare ahead of the cut off points for each scheme.”

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