Roger Dugan, Business Development Director, discusses the post-pandemic fallout affecting British businesses and explores the mounting challenges SMEs are facing as well as the potentially dire economic consequences of thousands of companies winding up at the same time.
The UK’s post-pandemic financial reckoning is now getting underway in earnest. It’s clear that companies are beginning to take legal action to recover their debts, and British companies are coming under significant financial pressure thanks to inflation and the winding down of pandemic financial supports.
The Begbies Traynor report for Q4 2021 found that 589,168 UK businesses reported significant financial distress during Q4 2021, up 5% from the previous quarter. It also identified an astonishing 106% rise in County Court judgments, which it regards as a “key early sign of future insolvencies as creditors are now actively using courts to recover debts”.
This remarkable increase in legal action will put further pressure on many UK businesses, which are already reeling from inflation, rising wage costs and withdrawal of government pandemic support. Julie Palmer, partner at Begbies Traynor, said “Support from the Government such as furlough payments, tax reliefs and a moratorium on landlords being able to evict businesses due to rent arrears cannot go on forever … The lag effect of the economic fallout from Covid, plus significantly higher inflation, has created a perfect economic storm for many companies, particularly the UK’s SME sector, which will undoubtedly drive insolvency rates even higher.”
The pressure is mounting on many businesses, even before all of the government’s supports have come to an end. The government last year extended its key moratorium on commercial rent arrears and premises recovery until 25 March 2022. Total arrears across the commercial property sector are now estimated to amount to some £6 billion. An important inflection point for many businesses is therefore now imminent.
Many distressed businesses will soon be faced with the stark choice of paying substantial rent arrears, coming to an arrangement with their landlord, or else being evicted. At that point, the financial pressure on many UK businesses will in all likelihood cause a further increase in insolvencies and financial distress across a wide range of UK business sectors.
Of course, businesses in financial distress inevitably spend less, and so this also creates a risk of precipitating a negative cycle, which dampens economic activity more widely. Many businesses will be forced to wind up. A glut of commercial premises could soon come onto the market at the same time. This is likely to hit the commercial property sector in turn – especially as it comes at a time when the rapid rise in homeworking and online shopping driven by the pandemic has already radically reduced the demand for office space and commercial property.
The government’s pandemic support for businesses hit the pause button on economic fallout from the pandemic. However, UK government figures for insolvencies in 2020 show that the generous pandemic supports kept companies afloat which would otherwise naturally have gone insolvent. For example, the data shows that as the pandemic hit in 2020, the number of companies becoming insolvent actually decreased by 27 percent, when compared to 2019.
This clearly implies that the government’s financial supports artificially kept afloat businesses that were teetering on the brink. These businesses are now set to collapse in the wake of pandemic support withdrawal, along with businesses that were directly impacted by the pandemic and the changes it wrought.
The economic damage will not be equally distributed, either by sector or geographically. Clearly, sectors such as commercial property may be disproportionally impacted. Some areas of the UK will be more severely impacted.
The pandemic has driven remarkable changes in how we work, live and shop. Many of these changes will be permanent, to a greater or lesser extent. We are soon going to see the economic impact of these structural social and economic changes play out in the real world. As with any moment of significant social and economic change, there will be winners and losers. Yet there is little doubt that this realignment will be devastating for many UK businesses, even as it causes others to boom.
Only time will tell how the post-pandemic economic disruption plays out across the UK economy. The only certainty is that the waiting game is coming to an end. In the coming months and years, we will see the fallout of the pandemic play out in real time, in terms of increased insolvencies and increased litigation in courts and tribunals across the country.