Watch out for the Recovery...
Last week brought the news that the UK has officially exited from recession, with the economy being boosted by 0.1% in the last three months of 2009. The growth was not as high as expected, and has been met with a mix of wariness and cautious optimism.
It is still a growth though, and that cannot be sniffed at. While in many camps that is undoubtedly good news, there are a number of businesses to whom economic recovery could actually sound a death knell.
Many businesses who have been teetering on the brink for most of 2009 have – quite understandably – made full use of the aid available during the recession. The VAT decrease, HMRC's Business Payments Support Service deferral scheme, and not least the reluctant creditors: these are all factors which have combined to throw a lifeline to those in dire financial straits. Aid such as this has meant that businesses who would otherwise have gone under have managed to cling on. Will these business survive, or have we delayed the inevitable?
In 2010, the picture is already beginning to change. VAT is now back to 17.5%, inflation is on the up and there is talk of the base rate going the same way. Of the tens of thousands of businesses whose applications to defer tax were successful, it will soon be time to repay the tax man.
While those pressures are sobering enough, there are also the creditors to watch out for. While the banks and trade creditors have been careful (and even reluctant) in putting their debtors into insolvency, the rationale behind that approach was understandable.
The banks, and particularly the Government-backed banks, have been subject to unprecedented public scrutiny. It would not have been wise for them to go for an out-and-out cull of their customers. Not only that, but the recession itself meant that many businesses were swimming in negative equity, leading the banks and all other creditors to adopt a wait-and-see approach. The news that the recovery may be in sight might be the signal for creditors to swoop in. Where asset values increase, there is an incentive to go after debt, as there might be a return available. The upturn itself may yet lead to a flurry of insolvencies.
For creditors, this may be an opportunity to recover. For businesses on the brink, this could send them over the edge. For directors of those companies, now is the time to consider if trading should continue, bearing in mind the risk of personal liability where a company trades while insolvent.
It remains to be seen whether the aid in 2009 has propped up businesses which should really have entered insolvency proceedings, and whether the bubble is about to burst for those businesses. Survival of the fittest may be the outcome. What is clear is that the recovery is unlikely to be good news for all.
For further information please contact: Fiona Carlin
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