After nine months of lockdown restrictions of with varying degrees of severity, the accumulated household savings built up to £200 billion by the end of last year and will be more by the time we are let loose. Obviously, though there is money to be spent, even the notoriously spendthrift British consumer cannot be guaranteed to splurge. What is needed is consumer confidence and a proactive business sector.
Bars, clubs, entertainment, travel, hotels and especially restaurants will be top of the spend agenda when we are allowed to go out again. But many businesses in these sectors have accumulated huge debts. Quite a few have shut down completely. Corporate insolvency numbers have started to rise. More are alive but weighted down with debt. The typical company in this sector – say a small city centre restaurant – will have furloughed its staff, borrowed from the Coronavirus Business Interruption Loan Scheme, taken advantage of HMRC’s schemes to delay tax payments, borrowed from its bank and avoided paying rent. British Land report that only 47% of its due rent was paid last year; Land Securities has just revealed that it has received only 29% of the rent due from its Central London non-office estate.
The restaurant’s three biggest creditors will be its landlord, its bank and HMRC. But it would be unusual if its suppliers weren’t also feeling the pain. One of my good friends, a wine importer, told me how aggressively a pizza chain had behaved with him when he asked it to pay its debts after a year! I wasn’t surprised to see that that chain has recently gone out of business.
De Tocqueville wrote that the time for revolutions was not when repression was at its worst but when conditions started to ease and people had hope. Sadly the same might be true with corporates. Understandably creditors are unwilling to push companies into bankruptcy at present when there isn’t much chance of getting back a reasonable proportion of the amounts owed. But if Cebr forecasts are right and the recovery is driven by an explosion of spending on hospitality and travel, it will be highly tempting for those owed money then to try to get their debts repaid. The pressure will not only be driven by a sense that morally they deserve repayment but also by an understandable desire to get to the front of the queue. If they are paid immediately, they might be paid in full. If they wait till other creditors are paid, there may not be much left.
The government has anticipated this problem and introduced in the Corporate Insolvency and Governance Act 2020 a new procedure for companies to go into temporary moratorium. The procedure has some similarities with the famous US Chapter 11. Companies going into moratorium have a short period to reorganise their debts and either reschedule payment terms or swap debt for equity. No one quite knows how this new procedure will work. Companies in moratorium will have their affairs supervised by a monitor who in practice will have a role like that of an administrator. But the role will not be easy, since the monitors will not want to impede the running of the business but at the same time will want to ensure that assets aren’t squirrelled away out of reach.
In this case the government has done well to legislate to help the recovery. But no one quite knows whether it has done enough – or conversely too much. Corporate legislation has a tendency not quite to work the same way in real life as it does in theory.
Perhaps most critical is the role of HMRC, which historically has had a chequered record in corporate recovery. And since the new legislation came in last December, it now has preferred creditor status for VAT PAYE debts though not for corporation tax.
To ensure that perhaps as many as a quarter of UK businesses are able to play their part in driving the UK recovery rather than being hamstrung by messy debates with creditors, it is critical that HMRC is tasked with keeping businesses alive and not abusing its status as a preferred creditor.