Corporate Insolvency Trends
The falling number of corporate insolvencies between 2011 and 2015 is likely to have been attributable to various factors. Since 2008 banks have generally taken a less interventionist approach with borrowers and the cost of borrowing has fallen to an all-time low. Additionally, insolvency practitioners have focussed on an early intervention approach to struggling businesses. The combined effect of these and other wider economic factors during that period resulted in fewer businesses needing to enter into a formal insolvency process.
However, it appears that changes are afoot within the business world. According to the Association of Business Recovery Professionals – R3, for the first time in 5 years, the number of corporate insolvencies saw a 12.6% year on year rise in 2016. In addition, R3’s October 2016 figures reveal that around 8% of businesses were only able to service the interest on their borrowing rather than the debt itself. These ‘zombie businesses’ appear particularly vulnerable to any interest rate rise.
It is too early to say whether this is the start of a trend of increasing business distress, however, as 2017 progresses there are several factors likely to impact upon different business sectors including the fall in value of the pound and rising import costs, the uncertainty and eventual outcome of BREXIT, inflationary pressure and the resulting squeeze on incomes.
In addition, two factors from the Spring Budget may adversely impact businesses which are already struggling.
First, in appropriate circumstances, the current system for Corporation Tax loss relief enables businesses going through the restructuring process to off-set 100% of previous losses against any one-off profits generated during the restructuring. However, from 1 April 2017, that rate of offset will be limited to 50% of the previous losses, resulting in some restructurings no longer being viable. The change will also have the consequence (likely intended) of effectively allowing HMRC to benefit disproportionately with the monies payable as a result of the lower rate of off-set rate being paid to HMRC rather than being available to creditors generally. Secondly, some businesses will be facing higher business rates notwithstanding the Chancellor’s announcement of transitional measures designed to assist businesses most adversely affected by the 2017 revaluation.
What is clear is that it will be an interesting and challenging few years ahead for businesses generally with an as yet uncertain economic landscape emerging before us as the impacts of BREXIT on businesses and the wider community become apparent.
John Bradshaw is a partner and head of the Business Services department at Barker Gotelee Solicitors.
(This article previously appeared in EADT on 29th March 2017)