Aon’s Samantha Taylor – Deputy Managing Director of Insolvency and Restructuring, Matt Tuckey – Claims Director and Carley Chaplin – Business Development Director see a rise in Company Voluntary Arrangements (CVAs) and Administration orders as an opportunity for insolvency practitioners to use the credit insurance market as a valuable part of their realisation strategy.
Insolvencies are on the rise according to the Office for National Statistics which reported that total company insolvencies in England and Wales have reached their highest level since 2009; revealing a gloomy picture further reinforced by figures from the Insolvency Service. The introduction of the Corporate Insolvency and Governance Act (CIGA) 2020 however, has raised the expectation that more businesses will trade on rather than being liquidated which, in turn, places more responsibility on insolvency practitioners (IPs) to restructure and recover. It’s in these scenarios where a closer partnership with the credit insurance market could pay dividends for IPs, not least in helping to ensure the creditors themselves survive to keep supplying the business they are administrating.
Economic Situation Deteriorates
As the economic situation deteriorates globally – exacerbated by the war in Ukraine – increasing inflation, rising interest rates, volatile foreign exchange rates and supply chain issues are beginning to bite hard. For businesses, this uncertainty is a backdrop to other difficulties such as the withdrawal of government support and restricted funding following the pandemic, as well as the need to start re-paying bounce back loans and meet deferred tax commitments.
The impact of Brexit can’t be overlooked either. The Office for Budget Responsibility estimates that Brexit will ultimately make the UK 4 percent worse off than it would have been, with the FT writing, “We've seen in all areas, in prices, in terms of investment, and in terms of trade, we're seeing negative effects due to Brexit, which we can now pinpoint as a Brexit effect, not a pandemic effect, not an energy crisis effect. These are very clearly Brexit effects.”
Add to all these factors the spiralling operational cost of doing business in areas like energy use and it is no surprise that more companies have simply stopped trading and liquidated their assets, with Creditors Voluntary Liquidations (CVLs) back to pre-pandemic levels. The Office for National Statistics reported 5,629 insolvencies for the second quarter 2022 – the highest since the third quarter of 2009. It also said, “More than 1 in 10 UK businesses reported a moderate-to-severe risk of insolvency in August 2022.”
New Insolvency Legislation
There is also an expectation that other types of insolvency such as Company Voluntary Arrangements (CVAs) and Administration orders to allow troubled businesses to restructure and continue trading will start to creep up over the next 6-18 months, following the introduction of the Corporate Insolvency and Governance Act (CIGA) 2020; widely reported as the biggest shake up of insolvency legislation since 1985. The Act put in place protective measures for insolvent businesses, potentially to the detriment of their creditors, which means that more distressed businesses can continue to trade with protection from their existing creditors. Given that the CIGA prohibits suppliers from enforcing their rights, any securities or imposing conditions on their clients, for example, requiring that they are obliged to continue to supply to the insolvent business on the same terms, it could expose creditors to more losses with no guarantee that they will be able to recover their arrears.
The Value of Credit Insurance for IPs
This is where the IP working more closely with the credit insurance market could be very helpful. Firstly, it is in the IP’s interest if the business they are administrating is going to trade on to make sure that key suppliers are also protected against insolvency. And the best way for creditors to protect themselves is to make sure they have trade credit insurance in place. If an IP provides a credit insurance broker with a list of the company’s creditors, the broker can contact those creditors and make sure that they are suitably insured against other customers being unable to pay which will protect their own solvent position and mean they can continue to supply the business in administration.
Secondly, credit insurance policies usually cancel on insolvency which hinders the ongoing viability of the business. The changes in insolvency legislation could however, mean that credit insurers might be more open to maintaining that policy, covering the distressed business from any unforeseen losses and further protecting the IP’s realisation strategy. Again, it is worth an IP talking to a specialist credit insurance broker to discuss the options and, where appropriate, the potential for coverage against suppliers defaulting from their contracts.
Competitive Advantage
Thirdly, the credit insurance industry can not only help IPs maximise the chances of the businesses they are administrating to trade on successfully but can also help IPs with their own business development in terms of providing access to valuable industry and sector country data collected by the leading credit insurers. Credit insurers assess the financial health of thousands of different companies, as well as sectors like food and drink, construction, electronics and engineering. Access to that sort of regular market intelligence – not available from the usual open sources like Companies House – could provide an IP with a competitive advantage when it comes for pitching for work.
Far from being perceived as the enemy in a restructure where traditionally credit insurers are seen forcing their clients to reclaim stock and further erode the value of the business in administration, the credit insurance industry can offer IPs far more constructive value in an insolvency environment where the increasing focus is likely to be on recover and restructure rather than liquidation.
For more information, visit https://www.aon.com/unitedkingdom/commercial-risk/credit-solutions/default.jsp
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