The cost of living crisis 


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The economic outlook is challenging. Businesses, organisations, and individuals who have managed to withstand the challenges and impact of successive lockdown measures, now find their financial wellbeing is threatened by the "cost of living crisis". 

The combined adverse implications of rising energy costs, inflation and interest rates affect all; individuals on universal credit, employees, the self-employed, business owners, large corporates, charities and other non-profit organisations, in all sectors.

For businesses, this could affect cash flow simultaneously with obligations to repay government support such as Bounce Back Loans and Coronavirus Business Interruption Loans. Pandemic related moratoriums on creditor action have ended and those who are owed money are likely to take swift action to recover unpaid debts. 

For individuals, the cost of energy as we head into autumn and winter is causing alarm which is only partially abated by the government's recently announced price cap. An ONS survey at the end of July 2022 found that 24 million people were reducing energy use in their home between March and June 2022, and around 16 million cut back on food and essentials.

It is therefore likely that both personal and corporate insolvency numbers will rise. As a consequence, registered providers may well have dealings with insolvent businesses within their own supply chains, and individual customers affected by the cost of living crisis. 

Supply chain insolvency

The ripple effect of insolvency in a supply chain can far reaching. Unsecured creditors, e.g., those who have supplied goods or services and await payment, or those who have pre-paid for goods and services and are yet to receive them, risk receiving pennies for every pound they are owed, and often such payment is not made until years later. Sub-contractors who predominantly work for one employer can often be owed such a significant sum that non-payment triggers their own insolvency. 

Generally, an insolvent entity will either cease trading or sell its business to a new entity who may seek new terms of supply, disrupting the supply chain. Creditors who have pre-paid for goods or services but not received these may need to fund an alternative, putting pressure on their own cash flow for unbudgeted expenditure. 

What steps should registered providers consider now?

  • Monitor the supply chain – this might include regular credit checks, as well as frequent communication within the supply chain. If there are any issues suggesting financial difficulties, react promptly. 
  • Contingency planning – can you be flexible to adjust provision of the goods and services you require to assist the supply chain if needed? If you have essential suppliers, what is your plan if these cease?
  • Be prepared to do your bit – as well as paying suppliers to agreed timescales (which should help trickle cash down the supply chain), protect your own cash flow by taking action to review bad debts and implement credit control measures fairly and robustly.

What should registered providers do if a supplier becomes insolvent? 

Creditors may receive notification of insolvency before or after the insolvency commences. Different types of insolvency have different consequences. For example:

  • A company in administration has the benefit of a complete moratorium, preventing legal proceedings and enforcement against it. 
  • Creditors cannot prevent a company going into liquidation but do get to vote on who becomes the liquidator(s). 
  • Creditors vote on a proposal for a company voluntary arrangement (CVA), and if approved, even those who voted against are bound by the arrangement.

Therefore, any notifications should be reviewed to determine what participation is required. Mostly, creditors will need to provide details of the sums owed to them (usually by submitting a 'proof of debt' form) and may be asked to cast their vote in relation to certain matters.

There may be other consequences, such as the impact on ongoing legal proceedings, the ability to recover items in the possession of the insolvent entity, or the ramifications for contractual arrangements and future supplies. Specialist advice should be sought. 

Customer insolvency 

The cost of living crisis is going to put more pressure on income. This may cause difficult choices. For example, does an employee pay their energy bills to heat their home, or fuel costs to get to work? Rent is usually high in a priority list, but registered providers may see larger number of late payments and defaulting tenants.

For affected individuals, good debt advice will be essential but can be difficult to obtain. The Citizens Advice Bureau, the National Debtline, and Step Change (among other organisations) all offer free debt advice and are all well versed in ensuring people are managing priority debts and accessing all the financial assistance that may be available. 

There are several insolvency measures that registered providers may encounter: 

  • For those in need of a breathing space, a temporary moratorium can be obtained. These were introduced in May 2020, giving individuals a short time in which they are protected from creditor action, to take advice and decide on next steps. 
  • Individual Voluntary Arrangements (IVAs) can enable payment plans with creditors to be formalised.
  • Debt relief orders (DROs) or bankruptcy help people draw a line and move forward free from historic debt.

Conclusion

With the Bank of England forecasting rising inflation well into 2023 and potentially beyond, and geo-political uncertainty linked to the high cost of gas in Europe, the economic outlook is certain to cause concern for some time, notwithstanding any government support that may be available. As a result, registered providers may encounter insolvency and should promptly consider any implications to manage the impact.

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