Blog - 18/04/2024
Restructuring & Insolvency
The Administration Series: Factors Affecting the Ebb and Flow of Administrations
Edwin Coe’s Restructuring & Insolvency team has put together a series of blogs on all matters administration related, covering background and insights into the process, technical guidance, case law updates and practical tips.
Please keep an eye out for our upcoming blogs in this series, and do not hesitate to get in touch with a member of our team should you require assistance in relation to a company facing financial difficulty. We are experts in this field and are here to help.
As detailed in our first blog in this series, A Short History of Administrations, the 15 years following the enactment of the Insolvency Act 1986 saw a relatively low number of businesses enter into administration. Not only was it an unfamiliar process, but it was procedurally complex and costly, and therefore not readily accessible or appealing to many businesses. Many of the issues surrounding the administration process were addressed by the Enterprise Act 2002, which introduced the out-of-court appointment route (making the legal formalities simpler, cheaper and more flexible) and expanding the rights of unsecured creditors.
Since the enforcement of the Enterprise Act 2002 in 2003, the number of administrations year on year has been largely erratic, but notably has never fallen back to pre-2003 levels. The Financial Crisis, Brexit, the cost-of-living crisis and Covid-19 are just a few of many challenges that businesses have faced in recent years. The extent to which businesses have overcome these challenges has varied, with many having to consider various rescue options, such as administration, to try and stay afloat in an ever-changing and ever-challenging climate.
In this legal update we consider the correlation between the economic and political climate, and the prevalence of administrations over the decades.
The Three Peaks
We look specifically at the years of 2008, 2019 and the period of 2020-2023, which have seen the most notable peaks in administration numbers in recent years.
2008: The Financial Crisis and The Credit Crunch
- 2007: 2,512 admins
- 2008: 4,822 admins
The year 2008, in the midst of the financial crisis, saw the greatest number of annual administrations since their introduction. Whilst the cause and fallout of the sub-prime mortgage crisis are now well-trodden ground, it is noteworthy that the fourth quarter of 2008 saw a pronounced spike in administrations, with 2010 appointments compared with only 1537 compulsory liquidations.
Why, then, was administration the preferred option? Administration is unique in offering short-term protection against enforcement without the requisite degree of finality, or damage to the surrounding business, that are a necessary consequence of terminal insolvency procedures. After Lehman’s collapse in September 2008, and with concerns surrounding the solvency of other large institutional lenders, it is perhaps unsurprising that companies favoured administration in an effort to weather the storm, and in anticipation of the Government’s £50 billion bailout package announced in October 2008.
Many businesses were forced to make employees redundant, significantly cut spending, halt extension plans and find new ways to stay afloat until the crisis subsided.
2019: Brexit
- 2018: 1,463 admins
- 2019: 1,813 admins
In 2019, there was widespread uncertainty surrounding the effects of the Brexit withdrawal agreement and the UK’s future relationship with the EU. Businesses were under pressure to stockpile goods in advance of the deadline ratifying the Brexit withdrawal agreement in April 2019, which was eventually pushed back to October 2019, causing uncertainty for businesses for much of the year.
Blair Nimmo, then Head of Restructuring for KPMG UK, said: “2019 was a year characterised by profound political and economic uncertainty, with consumer confidence remaining fragile and companies continuing to bear the brunt of rising overheads and increased costs. While many businesses battened down the financial hatches, adopting a prudent and cautious strategy, for some, the challenging trading conditions proved to be a bridge too far.”
2020-2023: Cost of living, high interest rates and the aftermath of Covid-19
- 2021: 796 admins
- 2022: 1,231 admins
- 2023: 1,567 admins
Between 2020 and 2021, the number of administrations were relatively small. This can be attributed to the significant government support measures that were put in place to keep companies afloat during the pandemic. By the time we reached 2023, repayments from loans granted during the pandemic started to fall due and companies struggled to repay these sums. New economic challenges such as the cost-of-living crisis, high inflation and political uncertainty surrounding the war in Ukraine have placed further stresses on companies and, as a result, have contributed to the increased number of administrators being appointed to companies in 2023.
From December 2021 to March 2024, the Bank of England increased interest rates from 0.1% to 5.25% signifying the most dramatic rise in rates since 2007 (where interest rates rose to 5.75% in response to the financial crisis). With the higher interest rates, there has been a corresponding increase in the cost of borrowing, such that many companies with a large amount of debt have struggled to keep up with their repayments. Higher borrowing charges have added to the costs already faced by companies with loan repayment obligations, and have further deterred companies from investing in new projects and equipment. Alongside these consequences of the rising interest rates, lenders have become more risk adverse, further inhibiting the growth and expansion of businesses.
What’s in store for 2024?
According to global consultancy firm Crowe LLP, businesses could face significant challenges in 2024 with a crisis that could “exceed insolvency rates of the 1990s”.
(Source: Crowe LLP)
Vince Green, Head of Recovery Solutions at Crowe LLP, commented, “While inflation is slowing slightly faster now, the similarities between the current economic climate and those of the early 1990s suggest a once-in-a-generation crisis for business. There is a growing divergence emerging between companies capable of riding the post-covid economic recovery and those entangled in financial issues, struggling to benefit as the increased cost of borrowing weighs down balance sheets. Hospitality, manufacturing, construction and retail sectors are facing the brunt of squeezed household budgets.”
So, as we look to the next 12 months, what trends might we see that contribute to a possible rise in administrations?
UK and US Elections: The uncertainty surrounding the upcoming elections, not only in the UK but also across the Atlantic, will inevitably have a global economic impact. As we know from the aftermath of Brexit, the fear of the unknown can often cause businesses to take the hit. Uncertainty surrounding the future of taxes, regulation, legislation and fiscal policy may limit the appetite for risky investments, lending and trade until the next party in power is revealed. This is combined with the fact that the future of the UK’s ‘special relationship’ with the US hangs in the balance as we await the identities of the next Anglo/American political relationship.
Spring Budget: In the government’s Spring Budget of 6 March 2024, it was announced the Energy Bills Discount Scheme would come to an end on 31 March 2024, marking an end to the support previously provided in respect of non-domestic energy bills. The effect will increase overheads for many businesses which, in an environment where energy bills are higher than ever, could be the tipping point for many companies.
Cost of living/inflation: Inflation seems to be showing signs of easing, and some may be optimisitic following the Office for National Statistics’ report that the UK economy grew by 0.1% in February 2024 from the previous month. This has largely been put down to the growth of the UK’s production industry which grew by 1.1%. Though this may spark hope that we have escaped a prolonged recession, these latest statistics could be counterbalanced by lower customer demand and business investment from the lagged impact of previous interest rate rises.
Net Zero: In addition to the ever-increasing interest rates and cost-of-living crisis, the Government’s drive for Net Zero by 2050 has already sent businesses into a frenzy. Some businesses are re-directing their investments into new, greener technologies and infrastructure, and in some cases, re-evaluating their entire business models. Perhaps we will see a trend of ‘survival of the fittest’ over the coming years, where the businesses unfit for change or unable to afford new ‘greener’ ways of running their business will be either pushed into administration or, worse, it may signal the beginning of their path to liquidation.
With the ongoing maelstrom of global challenges, both economically and politically, the consensus is that the number of administrations is set to continue increasing. Whether the administration figures reach the lofty heights of the Financial Crisis of 2008 remains to be seen, but with every ebb comes an inevitable flow, as the factors contributing to a rise begin to ease. What factors are likely to prompt such easing or when it will happen remains to be the big question. The more predictable position is that, with the current global financial and political circumstances as they are, directors need to brace themselves for a prolonged period of choppy waters ahead.
Our Restructuring and Insolvency team has considerable experience in advising businesses, directors and individuals facing financial distress. Should you require any assistance, please contact any member of the Restructuring & Insolvency team. We are experts in this field and are here to help.
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