Exclusive: End of furlough could be the ‘final ingredient in a catalyst for disaster’
The end of furlough payments could be the final ingredient in a catalyst for disaster for businesses, according to restructuring and insolvency lawyers City PM spoke to this morning.
With the winding up of the job retention scheme today, they warned that the 1,348 registered company insolvencies in August could rocket in the months ahead.
Under current restrictions, creditors cannot present a winding-up petition against a company based on a company’s inability to pay its debts will wind up from this week.
This means that many dormant lease issues, including the payment of deferred and ongoing rent, will come back into focus for many businesses.
In the context of slow growth and sluggish consumer spending, restructuring experts claim these flashpoints could create a culminative effect- which in turn could create serious and immediate cash flow and viability issues.
Suzanne Brooker, restructuring and insolvency partner at BDB Pitmans said that there are “initial warning signs” that this could be the tip of the iceberg for many businesses on the edge.
“There are foreboding signs that a number of ongoing challenges to recovery, shaped by the new operating environment of the post-pandemic, may become critical factors at the most inopportune moment,” Brooker told City PM today.
Brooker warns that the end of furlough is the removal of “what has been a critical lifeline for businesses throughout the pandemic”.
The furlough scheme prevented “catastrophic levels of unemployment” during the pandemic, according to the Resolution Foundation.
However, despite the ongoing labour shortage, “many companies in sectors such as aviation and retail have struggled to recover at a sufficient pace to mitigate losses from the pandemic,” she said.
Unwelcome additional pressures
Other issues, looming into view, may also provide additional unwelcome pressures upon businesses struggling to manage the multitude of challenges.
This includes how “HMRC deals with overdue payments and the repayment of deferred taxes, Time to Pay agreements and the impact on cash flow. Dealing with additional debt in the balance sheet, such as that accrued through the Coronavirus Business Interruption Loan Scheme, will be a priority – whether through repayment or debt refinancing,” Brooker warned.
Managing the transition, and associated costs, to new working models will also be increasing the financial pressures upon many businesses.
“This includes the need to adapt to new consumer behaviours, such as the rapid increase in online transactions, and the logistical problems arising from ensuring payments – and reducing provisions for non-payments – across fraught and disparate supply chains,” she explained.
In order to survive the difficult winter months, Brooker suggests that “businesses should now be taking steps to prepare and monitor a 13-17 week cash flow, as a matter of priority, as well as looking at core businesses to see where restructuring can take place without undermining viability.”
“Where necessary to secure survival, businesses should seriously start looking at either restructuring plans or Company Voluntary Agreements (CVAs) with moratoriums as an alternatives to insolvency,” she concluded.