Insolvency: Is a perfect storm brewing?
Thursday, 06 August 2020
The daily news from the media is focused on redundancies and firm closures.
In complete contrast, the monthly insolvency service statistics reveal a 50% reduction in corporate insolvency numbers in June 2020 compared to June 2019.
The reasons for this reverse actuality are attributed to a number of factors including:
- Increased government support during the COVID-19 pandemic
- Temporary restrictions on some insolvency procedures and limited HMRC enforcement
- Reduced operational capability of courts
All of the above reasons will either expire or be reversed and, whilst they may have delayed the inevitable surge in insolvencies, they won’t stop it.
If you add to this the UK’s exit from Europe and the ending of the transition period, which is due to take place later this year, and HMRC’s return as a preferential creditor from December 2020, then we may have the conditions for a perfect storm.
The last point about HMRC becoming a secondary preferential creditor is an interesting one for several reasons.
- Due to COVID-19, HMRC have allowed deferment of tax payments. By the time these payments are due to be paid, HMRC will have attained preferential status.
- The Insolvency Service is promoting a ‘rescue’ culture; it will be interesting to see HMRC’s position when considering recovering funds by virtue of its preferential status or supporting a company rescue with uncertain and deferred outcomes.
- Will company directors look to liquidate before HMRC’s preferential status is granted? This could result in greater company funds paying down all creditors, including those the director has personally guaranteed.
Look out for my future blogs reviewing the latest information over the coming weeks and months.