Exclusive
By Scott Wright
SCOTLAND will not see a “tsunami” of business failures when government support measures are eased off as the country emerges from lockdown, however, there will be failures and “phoenixes”, a leading insolvency chief believes.
Donald McNaught, restructuring partner at Scottish accountancy firm Johnston Carmichael, said he expects there to be a “gradual” rise in companies failing as more of the economy reopens.
While Mr McNaught argues that there is reason to believe Scottish firms, including those in the hospitality sector, will “thrive” when they are able to trade again, he believes some owners will elect to “phoenix” in order to move on unencumbered by legacy debts.
Mr McNaught said: “When businesses can commence trading, that is when we will see a lot of insolvency. Whether that coincides with the end of furlough or the end of VAT deferments, it is more going to be correlated to the ability of businesses to recommence trading, because that will trigger an appetite for people to go and acquire businesses.
“There will be a lot of phoenixes, I think. If you think of the business being separate to the legal entity it operates within, the legal entity is the one that carries all its liabilities. I suspect there will be a lot of businesses that will be viable going forward, but they can’t carry that legacy debt and they can’t sustain it.”
He added: “I expect there will be lots of phoenixes, rightly or wrongly. These are very contentious, and quite often the pre-pack scenario is something that is often criticised by stakeholders and sometimes quite rightly so, because of the lack of visibility sometimes on what has actually happened.”
The most up to date figures from Accountant in Bankruptcy (AiB) show there were 23 corporate insolvencies in Scotland in January, which was 68 per cent fewer than in January 2020. There were 592 company liquidations in 2020, down from 981 in 2019.
Mr McNaught put the low number down to the continuing support for businesses to help ensure their survival during lockdown, such as furlough, VAT deferrals and government-backed loans.
Companies continue to be shown “forbearance” by creditors such as banks, landlords and HMRC and “for good reason”, he adds, given the restrictions many businesses sill face.
Mr McNaught said he had expected a surge in failures in the travel industry, having handled a CVA (company voluntary arrangement) of long-established coach business David Urquhart in May, but that has not materialised. He said: “I have come to the view there will not be a tsunami – there will be a gradual increase in insolvency appointments that will be more manageable.”
He argues that it would be “false economy” for support to be withdrawn too soon.
Mr McNaught said: “It would just undermine all the efforts that have gone into keeping a heartbeat in all these businesses. I think there does need to be a measured approach.”
He added: “The reality is, and it is common sense, that the end of furlough or the end of tax deferments really needs to coincide with businesses being able to return to normal trading. Because if you do have a gap, there is a cliff edge. There is no other way to look at it.”
Mr McNaught observed it was “interesting” that recent AiB figures indicated there has so far been limited use of “insolvency tools” brought in by the new Corporate Governance and Insolvency Act 2020. The Act brought in a new a moratorium, offering businesses a degree of protection from creditors, and the right for owners to pursue a restructuring plan, in the expectation there would be a “tidal wave of insolvency”.
Mr McNaught said: “The English statistics suggested there had only been four moratoriums and five restructuring plans up to the end of January. Despite these tools being brought in to try to specifically deal with what the fallout might be, they have not been used. It underpins the fact that all these other measures have kicked the can down the road a bit.”
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