A very peculiar recession - Business Works
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A very peculiar recession

by John Harlow, Managing Director, Harlow Insolvency This has been a most peculiar recession. Stranger still if you happen to be an Insolvency Practitioner (IP), says By John Harlow, Managing Director at Harlow Insolvency.

Perceived wisdom dictates that in a recession, insolvency levels will go up, both personal and corporate. The deeper the recession, the more business failures there will be. Perversely, as the economy comes out of recession, insolvency rates are also expected to rise, due to shortage of cash and overtrading issues.

Historically, IPs have always had a better time on coming out of recession than when the economy is at its lowest ebb. In a recession there can be a glut of assets for sale, people are reluctant or unable to buy businesses and assets and banks have been unwilling to lend. This is reversed in a boom, as (historically) banks have been eager to lend and people will pay good money for businesses and assets. There is always a better chance of creditors receiving a distribution when things are on the up!

Throughout the last five years I have become accustomed to people telling me that, as an IP, I must be raking it in, that my profession must be the only one which has been making money. Regrettably this hasn't been the case and I have been forever trotting out the reasons to which I attribute the lack of work.

Business failures - the main culprits being the Banks and the Crown Departments

Business failures are usually precipitated through two main elements within the economy. Both come under the broad heading of creditor pressure, the main culprits being the Banks and the Crown Departments. Both of those have historically been instrumental in forcing people and companies out of business, when they became unable to meet their liabilities by the due date.

It has probably been politically unsound for a government department to be seen to be forcing businesses to close, creating unemployment and at the start of the recession we became accustomed to seeing the taxman and the VAT-man giving businesses up to five year time-to-pay agreements. Granted, this leniency was short-lived if the repayment schedule was missed and having to find the current tax and the repayment every month did itself cause some business failure due to the cash flow crises so caused.

What of the Banks? Again one must suppose that some political pressure was brought to bear, especially given the part the banks played in the initial causes of the recession. Unprecedented low interest rates have been the ally of distressed businesses, meaning that they were able to service indebtedness to the Banks, whilst from the Banks perspective, some cash-in was better than no cash-in which would be the inevitable result of foreclosure.

So, all of the above have seen distressed businesses hanging-on-in-there giving rise to the so-called Zombies and a tangible decrease in insolvency levels. But is this altogether healthy and has the fact that the dead-wood has not undergone the usual pruning process actually hampered the recovery? Are valuable resources being stultified through lack of productivity in these Zombies.

I think the answer to this is a resounding probably. The media are trumpeting the recovery and the green shoots are supposedly starting to blossom, which can only be a good thing although it is probably too early to establish whether this newfound growth will lead to the problems historically encountered. This is perhaps something worthy of consideration in a future blog.

On a final note, something which came up in a conversation in the pub the other night was the issue of the effect that the introduction by the taxman of Real Time Information (RTI) might be having. This wasn't something which I had considered before, but which raises an interesting point.

Both tax and VAT are now monitored much more closely by HMRC and the scope for running up large amounts of arrears should now diminish considerably. Whereas businesses used to be content to delay payments to the Crown in favour of payment to suppliers, who could, after all turn off the credit tap if unpaid, now pressure will come from the taxman much quicker, so maybe the creditor burden will start to fall on the shoulders of the ordinary suppliers. How will they react if this becomes the case, we may see a sea-change in the usual creditor / debtor relationship? Something again for consideration in a future blog.

For more information, please visit: www.harlowinsolvency.co.uk

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