While hopes have risen that a vaccine will end the current COVID-19 pandemic with UK Government approval, timing still remains uncertain along with concern over how long some businesses may survive. The impact of global and local lockdowns has been severe and with annual economic growth now lower than during World War 2, despite record Government borrowing to support economies, it is generally expected that corporate insolvencies will ultimately increase. Declining or close to zero revenue in certain sectors will have put direct pressure on companies’ cash flows but also indirectly, pressure will be felt as suppliers to those businesses also take action to protect the survival of their own businesses.
Based on the Companies Registry in the Isle of Man, to date, insolvent liquidations (either creditors’ voluntary liquidations (“CVLs”) or court appointed) as shown below remain at similar levels to the past 3 years.
This analysis will however only include companies where liquidators have been appointed. The number of companies which have ceased trading as a result of the pandemic, and are unable to repay creditors, may be much higher. In these cases, the directors may have been unable to afford the services of a liquidator or creditors consider recovery prospects to be remote. The Isle of Man is vulnerable to corporate abandonment in these circumstances, as there is no government appointed Official Receiver to act on behalf of the wider creditor base.
What is noticeable from the data above is the significant spike in the number of solvent or Members’ Voluntary Liquidations (MVLs) over the past 12 months. From 2019 to date, it shows an increase of 325% in MVLs, which relate to the winding up of a solvent company.
This is an unprecedented number and has not been witnessed in the past decade. Whilst Economic Substance requirements will have contributed to this sharp increase in Isle of Man MVLs, the link to COVID-19 is perhaps not immediately obvious but it is possible that the current environment has also contributed to the rise.
Outdated or obsolete companies
An MVL is typically used to wind up the affairs of a company when its original purpose becomes outdated or it has no further use. Often once a company has ceased trading or if perhaps it was set up to hold properties and the properties are subsequently sold, it can sit dormant for many years. Taking steps to formally close the company may often be low on the list of priorities for the directors, however the benefits of doing so shouldn’t be overlooked.
Marie Kondo for Companies?
The significant increase in MVLs may relate to corporate simplification of group structures. Frequently these will have evolved over time, often because of acquisitions or inclusion of Special Purpose Vehicles set up for tax, legal or other reasons. This can in time result in unduly complex or unwieldy structures which can in turn put a strain on management resources, with additional reporting requirements and operating inefficiencies. Ultimately the group structure may lose transparency which can be problematic for both management and investors.
The pandemic, together with changes to Economic Substance requirements, will have forced organisations to seek greater efficiencies and cost reductions. One such action is corporate simplification. This aims to identify and eliminate non-trading or redundant companies in order to achieve a simpler group structure resulting in efficiencies and cost savings. The cost of management time is difficult to quantify but there will be direct costs of maintaining group companies such as corporate service providers, audit fees, tax and potentially penalties for late filings.
As well as cost savings, other benefits achieved by eliminating companies either by directors’ dissolution or MVL can in turn increase transparency, improve governance and can reduce risk.
One of the key considerations when eliminating a company by either directors dissolution’ or MVL is identifying and assessing a company’s liabilities (existing and known, potential or contingent), particularly those which are not disclosed in accounts and may arise where termination of a company’s activities is contemplated. If companies are left dormant over a long period of time, potentially individuals involved in setting up the company or are an integral part of the activities may no longer be available, resulting in a fading corporate memory. This may result in key considerations for determining whether a company is solvent to be more challenging.
Without continued financial support and ongoing pressures from the Covid-19 pandemic there will undoubtedly be companies which will not survive in their current form. Whilst the number of insolvencies in the Isle of Man has remained low for 2020 to date, the start of 2021 could be quite different with financial pressures increasing from the build-up of arrears of outstanding rent, tax or loan repayments which companies have put off paying to ease their cashflow. It is important to note that given the activities of Isle of Man companies may be extra-terratorial, they are not limited to local causes. If directors of groups have not already taken steps to consider rationalising their structure, given the long-term outlook, now is the time to act.
Associate Director, Advisory
KPMG Crown Dependencies