The outlook for business post-pandemic
As we work towards exiting the pandemic we’ve spoken to insolvency expert, Blair Nimmo CA, on the outlook for businesses post-pandemic.
Blair, the former UK Head of Restructuring and Global Head of Insolvency at KPMG, is Interpath’s Chief Executive Officer. As well as leading the strategic direction of the Interpath business, Blair also takes an active oversight role in the firm’s largest insolvency assignments and in managing some of its largest client relationships.
Some have predicted a tsunami of corporate and personal insolvency coming down the line. The same was predicted during the financial crisis in the late 2000s but it never really materialised. What’s your view on the outlook?
Certainly, this time last year, people were suggesting that we were on the brink of seeing a deluge of insolvencies. Clearly this has failed to materialise, in large part thanks to the raft of government support measures, from the Job Retention Scheme to the various loan and grant schemes, tax deferrals and the commercial rent moratorium. Nevertheless, it’s clear there are companies in certain sectors which are really struggling, and it’s also clear there comes a point when all of these liabilities will need to be repaid. Nevertheless, the outlook doesn’t feel as gloomy as it once did and, at this point in time, it’s quite difficult to predict how it will play out.
How much impact will HMRC’s attitude to taxpayer debt have on the ability of the economy to recover?
It will be crucial. If they choose to pursue debts aggressively, they could precipitate significant levels of insolvencies. On the other hand, they do need to recover funds for the public purse. It’s going to be a delicate balancing act.
The good news is, at the moment, they remain supportive – and rightly so. And all the signs point to them wanting to take a pragmatic approach as we build our way out of the crisis. For instance, it has been reported that for companies in the leisure and hospitality sectors, the government will propose a model which would require both landlords and tenants in commercial properties to share the rent burden for the period where lockdown restrictions were in place, which would then be paid off over a number of years. It’s likely similar ‘Time To Pay’ schemes will be facilitated to ensure companies won’t have to immediately divert significant amounts of cash to pay the large liabilities due.
How proactive have businesses been to restructure operationally and financially to recovery from the pandemic economic shock?
Right from the start of the pandemic, companies were incredibly proactive at grasping the nettle. Those early weeks back in the spring of 2020 were characterised by organisations having to make tough decisions at speed to protect their employees and business – whether that was closing down, putting operations into hibernation, furloughing staff, launching contingency plans or simply trying to respond to government directives. After that, it was all about building resilience – implementing contingency plans, undertaking regular forecasting and stress-testing. Now, they’re in recovery mode. Their speed and agility in reacting to the crisis – often off their own back, without the help of professional advisors – was instrumental in stemming the flow of insolvencies. They deserve enormous credit.
Business phoenixism is often considered unethical and the UK Government has introduced additional legislation to deal with the sale back of a business to connected parties out of administration. Will the new measures address the concerns?
The concerns around phoenixism are understandable, particularly amongst creditors who often endure significant losses.
However, if you were to prohibit transactions to connected parties all together, you would significantly reduce the chances of being able to save a business. Often, connected parties already know the business inside-out, they understand its dynamics and, in a situation where time is of the essence, are often able to transact quickly.
There is also an argument that, in a COVID environment where corporate distress has been caused by events outside of directors’ control, rather than by individual mis-management, there is a genuinely good reason why a business should be sold back to management or a connected party.
It’s important therefore that measures are in place which prevent abuse of the system. The new laws which require mandatory independent scrutiny of pre-pack administration sales where connected parties are involved in the purchase should certainly help to improve confidence in the process.
New legislation was rushed through Westminster last year to introduce a new moratorium and a new restructuring plan, although both had been planned for some time. The number of companies using the new procedures can be counted on less than two hands. Why is this? Do you think the moratorium and restructuring plans will have their place to play in the future?
I think most restructuring practitioners would agree that we’ve never felt like we didn’t have the right tools available so, in this context, the new moratorium and restructuring plan were never going to be game-changing. However, they are useful additional tools in the kit and – as we saw recently with Virgin Active – do have a place in certain circumstances.
Like any new process, it takes time for them to be understood and used correctly. So, while we may have seen few instances of their implementation to date, we may see them used more and more as time goes on.”
Recent confirmation of a nine-month extension to the commercial rent moratorium to 25 March 2022 has come as a double-edged sword – broadly welcomed by tenants, but prompting further frustration amongst under-pressure landlords who, by the time the moratorium ends, will have been prevented from collecting arrears for two years.
The silver lining is that this significant time extension to the moratorium is to allow for an arbitration process to be established between tenants and landlords, which will be entered into by both parties and be legally binding if a commercial agreement on the repayment of arrears cannot otherwise be reached.
This is a welcome development and, in the absence of initial agreement, should help landlords and tenants arrive at a commercially acceptable and pragmatic compromise.
However, it’s unclear at this early stage how many cases will need to be heard by the arbiter and the attitude they will take towards both sides in the event of a dispute, which for now creates further unwelcome uncertainty.
We’d therefore advise both sides to enter into pre-arbitration discussions in good faith and seek a fair commercial settlement in the first instance. Appointing an independent party to review proposals and test existing covenants may be a way of building confidence into the process and may help find an agreement that both sides find acceptable and sustainable.
