As we begin the third year of life with Covid-19, and have completed the first twelve months of life outside the EU, we thought it would be a good opportunity to pause and reflect on the last twelve months whilst also looking towards the year ahead.
Supply chain challenges
Whether it’s down to the pandemic or Brexit, or a combination of the two, there can be no denying that 2021 was a challenging year for suppliers. Nando’s and KFC ran out of chicken, AO World announced that the lack of chips would impact on toy production in the run up to Christmas and the Suez Canal came to a standstill when a ship became stuck in March. These supply chain issues have led to businesses looking at reshoring production in some cases, where others have had to accept that there will be delays for customers (particularly in car manufacturing and component-driven products). It’s unlikely that the supply chain will reset itself soon, especially, for example, with sectors like haulage, where there is a set amount of time required before workers accumulate the qualifications/experience needed to carry out their jobs proficiently.
The Great Resignation
Another issue arose during 2021 – retaining staff. In Britain, resignations reached a record high in the third quarter of 2021. Whilst the rates are highest in industries where wages are lower (such as hospitality), workers are looking for better options across sectors, and that in turn has led to an increase in salaries, especially where demand is not meeting supply (such as the haulage industry). The increase in wages looks set to continue and businesses should be mindful of the increase in National Insurance Contributions set to be introduced in April 2022.
There will come a point when the deferred liabilities need to be repaid. This does offer an opportunity to look at how businesses are financed and there may be potential for refinancing, however a business’ ability to do so will depend upon its level of deferred liabilities, as well as what those liabilities comprise. For example, the change in status of HMRC in December 2020 to preferential in the event of a formal insolvency, will likely discourage many lenders from supporting businesses with new debt without any additional security where there are still significant Crown liabilities. Managing cash tightly for an extended period may assist with this, and due consideration should be given to any additional borrowing where there is already a significant level of debt in the balance sheet.
Landlords will be counting down until 25 March 2022, when the current restrictions end. There will be the need for ongoing negotiations, and tenants should be mindful that if they are in a position where they have significant arrears, having a good relationship with your landlord will be vital if you need to negotiate. Contributing towards the arrears will help to improve the relationship.
Managing Cashflow Pressures
The UK Government were adamant that businesses should not fail unnecessarily as a consequence of the pandemic. Billions have been pumped into the UK economy to help businesses weather the storm, which has meant that cashflow pressures have not been as bad as they might have otherwise. There has been significant liquidity in the UK economy in 2021, however the upturn in insolvencies as we commence 2022 may be an indicator that the cash is starting to run out, which would coincide with the end of various Government support measures (such as furlough and the inability to issue winding up proceedings).
Distress into insolvency?
There is still some uncertainty as to whether 2022 will see a tsunami of insolvencies. However, what we can say with some degree of certainty, is that there are always businesses that need to be rescued or liquidated, in good and less good times, and the removal for a period of creditors’ ability to take action for non-payment, most definitely removed the “burning platform” which may have otherwise seen those companies enter formal insolvency. Those businesses which have probably been in some sort of hibernation mode for the last 12 to 18 months will still need assistance, and so for that reason alone there is likely to be an increase in formal insolvency appointments in 2022.
The restructuring toolkit is bigger
One positive from the pandemic is that certain promises of change in insolvency legislation have been accelerated to help meet the need of business rescue. The changes brought in through the Corporate Insolvency and Governance Act (“CIGA”) have introduced some “debtor in possession” procedures, which gives companies the chance to be rescued, whereas the more traditional formal insolvency looks at rescuing the business, not the company. It also means that businesses have the opportunity to recover from a “one-off” event without the need for a formal process, which will likely be good news as we exit the pandemic. Having said that, with HMRC’s change in status, if there are significant Crown arrears, it may be difficult to negotiate a Company Voluntary Arrangement (“CVA”) as HMRC have advised that they will not support proposals that offer less than 100p in the £ on their preferential debt (i.e. VAT and PAYE). Whether this will see an increase in companies proposing restructuring plans under CIGA (where there is the ability to cram down dissenting creditors) remains to be seen.
Expect the unexpected
The last two years have taught us that the only thing that is certain, is that the short term will be uncertain. A company’s ability to adapt remains the focus for 2022 and beyond. In order to be best-placed to deal with the upcoming challenges, it may be necessary to make some operational changes or restructure debt, and companies need to be honest and ask themselves whether they have the skillset or capacity to make those changes. If the answer is “no”, then seek assistance to make those changes – the companies that choose not to do so will likely be the ones that are left behind.