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Professional firms warn of wave of Covid loan-linked insolvencies

Interest rate and inflation “double whammy” could spell the end for indebted businesses, say Evelyn Partners and Clarke Willmott.

Rising interest rates and continued high inflation are creating a “double whammy” that could trigger a wave of insolvencies among businesses that took out government loans during the Covid-19 pandemic, according to experts.

The UK government backed billions of pounds worth of loans after the onset of coronavirus, through financial support programmes including the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS).

According to the latest government figures, businesses have drawn a total of £77 billion in coronavirus loans as of 31st March 2023. More than 7.5 per cent of these facilities are either in arrears or have defaulted – equating to over £3.5 billion.

While businesses were required to undergo due diligence in order to receive money through the CBILS scheme, BBLS – which provided loans of up to £50,000 interest-free for the first 12 months, with borrowers self-certifying their position – has been dogged by allegations of fraud. The government figures show that £1.18 billion in loans to businesses have been flagged by lenders as suspected fraud.

And leading professional firms Evelyn Partners and Clarke Willmott have warned that many businesses currently struggling to meet their Covid loan repayments face going out of business altogether against a backdrop of rising interest rates, high inflation, and increasing staff and energy costs.

Claire Burden, partner and head of the advisory consulting team at Evelyn Partners, the leading integrated wealth management and professional services group, says her team is currently working on cost reduction and performance enhancement projects with numerous indebted firms.

“We are seeing plenty of businesses that have been on payment plans for PAYE and VAT arrears post-Covid which are now struggling to stick to them. HMRC is becoming increasingly active in terms of recovering the loans and it is reluctant to extend or re-negotiate terms,” she said.

“Some businesses which took on debt during the pandemic now have real issues with the rise in interest rates in recent months, which has led to potentially crippling repayments – and this, combined with rising inflation, has had the effect of creating a ‘double whammy’.

“As always there will be winners and losers in this situation and businesses need to be opportunistic, because those that fail to act will soon run out of options.”

Peter Brewer, partner and banking litigation specialist in the commercial litigation team at Clarke Willmott, said he was also aware of increasing numbers of firms struggling to repay loans taken out at the height of the pandemic.

He said: “The chickens are coming home to roost and this could spell the end of many ‘zombie businesses’ – those that only have sufficient funds to service the interest on their loans, but not the debt itself.

“Some businesses are struggling through no fault of their own, operating in markets where staff costs, energy costs, inflation and interest rates all have an impact and where they can only pass on a small part of the extra costs to their customers.

“In terms of Covid loans these businesses are the ‘can’t pays’ but there are also the ‘won’t pays.’ Businesses were able to secure CBILS loans through their existing bank and there were certain criteria against which the loans were given, but in the case of BBLS there were very few background checks and generally a lack of due diligence.

“The Treasury’s intention – to provide quick and easy liquidity for businesses – was honourable but the fact remains that bounce back loans were susceptible to fraud and a minority of businesses have misused them to buy luxury items or to set up dormant, non-trading businesses from which they have paid themselves dividends, with some even being used to fund criminal activity.

“It is these businesses from whom HMRC is struggling to reclaim what is owed.”

Ken MacLennan, partner in the insolvency and restructuring team at Clarke Willmott, predicted that a significant number of businesses will not be able to successfully ride out the current storm.

Many businesses have been able to navigate Covid successfully on their normal bank terms and if they’ve taken out a CBILS loan for ‘rainy day’ strategic purposes, they have been able to pay it back. However, other businesses, which may not have been so well run, are not so fortunate.

“HMRC, as well as Covid loan lenders are, rightly, looking at the significant debts that are owed to them, having built up over or because of Covid. HMRC is being proactive in seeking to recover its debts and this is likely to lead to high levels of insolvencies across a range of sectors in the UK over the next two to three years.

“We need only look at the casualties of last season in the English Rugby Premiership for evidence of the tough stance HMRC is taking with some of its debt.

“Of course there is always an opportunity for these indebted businesses to avoid insolvency or at least mitigate the damage by seeking professional advice and, if this is done early enough, the situation may still be recovered.”


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Ken MacLennan


Bristol, Cardiff and Taunton
Ken MacLennan is a partner in Clarke Willmott’s Bristol Insolvency & Restructuring team and has a wide range of experience in corporate restructuring.
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