My colleagues and I at the Centre for Economics and Business Research (Cebr) are quite optimistic about the pace of the UK recovery once lockdown ends. The accumulated household savings at the end of 2020 had built up to £200 billion and will be more by the time we are let loose in a few months’ time.
Although there is money to be spent, even the notoriously spendthrift British consumer cannot be guaranteed to spend it. What is needed is confidence at the consumer end and a proactive business sector.
The areas where we will want to spend most post-lockdown will be those which have been worst hit during the pandemic. Bars, clubs, entertainment, travel, hotels and especially restaurants will be top of the spend agenda when we are allowed to go out again.
But there is a problem. The bulk of the businesses in many of these sectors are small and have accumulated huge debts. Many have shut down completely. The latest data shows that corporate insolvencies have just started to rise. And some 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 has reported that only 47 per cent of its due rent was paid last year; Land Securities has just revealed that it has received only 29 per cent 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 the 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 anything back.
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 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 has introduced into the Corporate Insolvency and Governance Act 2020 a new procedure for companies to go into a temporary moratorium. The idea is that the moratorium provides 20 business days’ protection from certain creditor action. It can be extended for a further 20 business days without any consent, or for longer with consent of the pre-moratorium creditors or the court. The procedure for going into moratorium has been simplified until the end of March 2021, intended to coincide with the end of lockdown. 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 out in real life. 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 be a tough one, given that 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 squirreled 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 to not work quite the same way in real life as it does in theory.
Perhaps most critical is the role of HMRC. Historically, HMRC 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 and PAYE debts, though not 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, it is critical that HMRC is tasked with keeping businesses alive and not driving them into the ground by abusing its status as a preferred creditor.
Douglas McWilliams is founder and Deputy Chairman of Cebr, the economics consultancy.