Corporate insolvencies dropped to their lowest point in four years during the second quarter – but experts have warned that it is looking like the calm before the storm.
274 companies in the UK entered administration in the second quarter of 2020, representing a 28% reduction on Q1, according to analysis by KPMG.
The quarter was almost entirely a period of lockdown, with government measures having a dramatic impact as consumer spending plummeted.
Blair Nimmo head of restructuring at KPMG, said a sharp rise in insolvency numbers should be expected in the coming quarter.
“Businesses are emerging into a quite different landscape. They may be required to navigate unforgiving territory, combining the withdrawal of government support, local lockdowns, consumer caution and shrinking margins due to new health and safety regimes and reduced productivity.
“The months ahead will see real pressure on cash flow as a consequence of the working capital demands of reopening, whilst at the same time servicing and repaying new bank facilities, repaying tax arrears and the costs of any required redundancies.
“The need to focus on building financial resilience and maintaining liquidity cannot be overstated. Managing a ramp-up in business activity in such an uncertain economic environment will be one of the biggest challenges many directors have ever faced. Understanding the cash and timing impact of business decisions may prove critical. Knowing the levers that are available and how to prioritise them will be a key feature of robust business planning.”
The severity of the poor financial health of some casual dining businesses in particular is already evident.
Many operators were struggling pre-Covid-19 and the easing of lockdown has brought a raft of closures, CVA proposals and administrations. These are expected to continue and indeed accelerate as some of the government support schemes wind down.
Mr Nimmo concluded: “Given this outlook, the Q3 insolvency data could tell quite a different story. However, the most significant change to insolvency legislation in nearly two decades came into effect at the end of June.
“These provisions – including a new moratorium process providing breathing space from creditor pressure and temporary changes to certain director requirements – may help some businesses find a solvent solution to their financial challenges, avoiding the need to enter administration or liquidation.”