On the surface, there are signs of optimism that the UK economy is able to stage a resilient recovery from the COVID-19-induced downturn, and the time is approaching for some government support measures be wound down. One such measure, which saw winding up petitions temporarily paused, expires on 30th June.
This measure arguably gave many businesses facing financial hardship some extra breathing room, but its expiration could cause them to lose their footing and trigger a wave of collapses.
Emergency measures expire
As with many emergency measures enforced by government during the pandemic such as the furlough scheme, the pause on winding up petitions was only a quick fix, not a long-term solution for many businesses. Winding up petitions are tools used by creditors, considered the last resort, when demands for repayment of unpaid debts go unheeded.
Under winding up petitions, a creditor makes a statement of intent, a legal notice ordering the closure of a business due to unpaid debts. As you can imagine over the pandemic, a higher volume of businesses faced cashflow problems due to falling revenues and rents or suppliers left to pay. In ordinary times, a government would simply let nature take its course, and for such financially-weak businesses to close.
However, with the COVID-19 pandemic, the economy was in freefall when lockdown was enforced, and there was a risk that whole swathes of businesses could collapse and never return, causing a new depression. Government intervention was the price to pay for keeping many businesses from going under, but when the measures expire, they might have simply delayed the inevitable.
Zombie businesses rise
Concerns have grown during the pandemic that government interventions have simply created a culture of zombie businesses – businesses which can barely muster enough profits to cover debt interest payments. In 2020, it was estimated that 20 per cent of UK companies were considered zombie businesses, and in a dynamic economy, these businesses would be just one missed payment away from complete collapse.
While it is unclear how many businesses requested government-backed COVID-19 loans through CBILS and CLBILS or how much they borrowed precisely, the expiration of the freeze on winding up petitions is certain to prompt creditors to lay down the law as they see fit, and start chasing after the money they are owed.
This could be the catalyst, that much-needed nudge to push many vulnerable businesses in distress over the edge, and remove less productive enterprises, allowing investors and shrewd-minded people to enter the markets. Markets rely on something of a Darwinian state of affairs in order to create high-productivity enterprises of the future, so keep an eye out from June 2021 onwards, as an increasing number of acquisition opportunities may arise.