The number of corporate insolvencies seen during April 2020 was down by a third on the previous year.
As government support packages have given companies vital headroom to deal with the Covid-19 pandemic.
A total of 61 companies fell into administration during April 2020 compared to 91 in April 2019, according to analysis of notices in The Gazette by KPMG’s Restructuring practice. Meanwhile, March saw 135 administrations, compared with 116 in 2019. In total, there were 444 insolvencies during the first four months of 2020, down 5% from the 468 seen between January and April 2019.
Blair Nimmo, Head of Restructuring at KPMG, said: “Comfort can be taken from the fact that we haven’t yet seen the deluge of companies falling into administration that many predicted, as the breadth and depth of government support measures available, coupled with a supportive lending community, have given organisations vital breathing space in these early days of the crisis.
“The proposed changes to insolvency legislation, which include the suspension to wrongful trading rules, are also likely to help relieve the pressure on directors, some of whom have chosen to stop production and/or enter hibernation where they may previously have had little choice but to appoint administrators.
“However, the old adage that ‘more companies fail coming out of a recession than fail going into it’ will be front of mind for many executives who now are trying to forward plan their exit from lockdown.”
There remains a huge number of ‘unknowns’ which make planning for an exit particularly difficult – from how long it will take for customer demand to bounce back and minimising disruption across supply chains, to the cost of implementing social distancing measures, and whether the Government’s Job Retention Scheme will be tapered out, failing which many businesses are likely to make significant redundancies across their employee base.
Nimmo continued: “While recognising that things will not go back to the way they were overnight, and that a phased approach will undoubtedly be necessary, businesses will nevertheless need to take care not to fall into the classic trap of scaling up too quickly.
“Many will have burnt through cash reserves during the lockdown period, and while some will have taken advantage of the various government support packages available, it must be remembered that at some point, loans will still need to be repaid – a burden which comes on top of having to finance any ramp-up in production, repay tax deferrals and re-engage staff who have been furloughed.
“Companies should therefore think about embedding as much of the cost-saving gains made in their initial crisis response as possible into their day-to-day operations, as well as opening dialogue with key suppliers and financial stakeholders on repayment plans that support a recovery on both sides of the table.
“Some organisations may also start to rapidly explore disposals of non-core or ageing assets as a means of generating cash.
“Finally, it will be essential to model the medium to long-term financial impact of a market that may ultimately operate on reduced activity levels, and importantly, assess the cost base required to support that, as it is highly unlikely to look the same as the pre-crisis operating model.
“Nevertheless, it may also be the case that we start to hear calls from businesses for further support packages to be made available to help them navigate the exit out of the crisis.”
KPMG’s recent analysis of the levels of stress and distress across corporate Britain showed that companies in the telecommunications, pharmaceuticals and food and drink sectors were best positioned to withstand the significant downturn. Conversely, companies in the non-food retail, casual dining, and travel and tourism sectors, as well as those indirectly impacted, such as real estate, were most vulnerable to the current economic shock and may need more government support packages.