Covid-19: corporate insolvencies fall in April

The number of corporate insolvencies seen during April, the first month of the Covid-19 lockdown, was down by a third on the previous year, as government support packages have given companies vital headroom, according to analysis by KPMG

A total of 61 companies fell into administration during April this year compared to 91 in April 2019, according to analysis of notices in The Gazette.

Meanwhile, March saw 135 administrations, compared to 116 in 2019. In total, there were 444 insolvencies during the first four months of 2020, down 5% from the 468 seen between January and April 2019.

Blair Nimmo, head of restructuring at KPMG, said: ‘Comfort can be taken from the fact that we haven’t yet seen the deluge of companies falling into administration that many predicted, as the breadth and depth of support measures available, coupled with a supportive lending community, have given organisations vital breathing space in these early days of the crisis.

‘The proposed changes to insolvency legislation, which include the suspension to wrongful trading rules, are also likely to help relieve the pressure on directors, some of whom have chosen to stop production and/or enter hibernation where they may previously have had little choice but to appoint administrators.’

However, Nimmo cautioned that companies may still fail as they try to leave lockdown, pointing to the large number of ‘unknowns’ which make planning for an exit particularly difficult – from how long it will take for customer demand to bounce back and minimising disruption across supply chains, to the cost of implementing social distancing measures, and whether the government’s job retention scheme will be tapered out, failing which many businesses are likely to make significant redundancies across their employee base.

Nimmo said: ‘While recognising that things will not go back to the way they were overnight, and that a phased approach will undoubtedly be necessary, businesses will nevertheless need to take care not to fall into the classic trap of scaling up too quickly.

‘Many will have burnt through cash reserves during the lockdown period, and while some will have taken advantage of the various government support packages available, it must be remembered that at some point, loans will still need to be repaid – a burden which comes on top of having to finance any ramp-up in production, repay tax deferrals and re-engage staff who have been furloughed.’

Separate research from the Opinium-Cebr business distress tracker which surveys 500 businesses fortnightly on how they are coping with coronavirus, shows 10% say that there is a ‘high’ risk they will enter insolvency as a result of the crisis.

The majority (51%) state that there is at least a ‘small’ risk that they will go insolvent, equating to nearly 3m firms across the country.

Based on the responses, more than a quarter of a million businesses say will not be able to survive if trading conditions remain as they are for another month, while one million said they could survive three more months of the lockdown.

The research found businesses on average say they will need six months to return production to pre-crisis levels, while one in six state they will need at least a year to recover. During the first 30 days of the national lockdown, businesses’ profits were down on average 29%.

Pablo Shah, senior economist at Cebr, said: ‘These figures dash hopes of an immediate bounce-back once restrictions are lifted, and instead point to a prolonged period of subdued output that is set to last for a period of years, rather than months.’

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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