The Bank of England has said it anticipates that rates of corporate insolvency will increase in the coming weeks following the removal of restrictions on winding up petitions.
Creditors were legally prevented from pursuing winding up petitions against their debtors for around 18 months after the pandemic first hit the UK but those restrictions were lifted as of October 1st.
Expectations are that the changes to the rules around winding up petitions will lead to a notable increase in insolvencies particularly among small and medium-sized businesses in the final three months of 2021.
For some businesses, the recent closure of the government’s furlough scheme and other financial support mechanisms represents another challenge to their sustainability.
Fundamentally, for a lot of companies, the issue is the amount of debt they took on during the pandemic to survive the worst months of the crisis.
The Bank of England noted in a recent update that increases in corporate debt seen during the pandemic were concentrated to certain sectors and among SMEs.
Debts were taken on by businesses on a vast scale in 2020, with lenders told that the government would guarantee any loans they handed out and borrowers assured of low rates of interest.
Many thousands of SMEs were saved from collapse in the short term because of those policies but there are expectations that many companies will at some point become unable to service the debts they took on during the crisis.
“Many of these SMEs had not previously borrowed and some would not have previously met lenders’ lending criteria,” the Bank of England noted in a recent statement.
“The increase in debt - though moderate in aggregate - has likely led to increases in the number and scale of more vulnerable businesses.
“As the economy recovers and government support, including restrictions on winding up orders, falls away, business insolvencies are expected to increase from historically low levels.”
The insolvency and restructuring trade body R3 is advising company directors worried about their cashflows and how they will manage their money in the final third of this year to seek advice from relevant professionals sooner rather than later.