As we are beginning to understand the potential longer term impact of the coronavirus (COVID-19) pandemic, it provides an opportunity for directors and business owners to assess the scale and magnitude of COVID-19 on short-term objectives while keeping an eye on long-term performance. 

The Isle of Man’s economy is more diversified than most Island economies of a similar size, having moved away from our reliance on offshore banking toward information and communications technology, insurance, and e-gaming. We benefit from having close ties with the UK, and we have during the past 22 months shown ourselves to be proactive and effective in dealing with the exogenous shocks of first Brexit and then COVID-19. In my view a key component that has held our economy together throughout the past months has been the leadership, financial support, and domestic stimulus activities of the Isle of Man Treasury. With many of the Government support packages having ended or about to end, we are slowly starting to understand the lasting impact of COVID-19 on local businesses. 

The cautiously positive situation is supported by trends in local corporate insolvencies during the past 22 months. We have seen a proliferation of solvent Members’ Voluntary Liquidations, which in our view have been mostly due to corporate simplification projects and substance requirements affecting tax resident companies. There has been a steady flow of insolvent Creditors’ Voluntary Liquidations, although not near the level of solvent liquidations. There have been an even fewer number of Involuntary (Court) liquidations.  

Interestingly we have also seen significant activity in mergers and acquisitions for a variety of reasons, such as making strategic acquisitions in respect of specialist technology and obtaining key members of staff with specialist knowledge and skills.  

I view the above local trends as encouraging, not because of the cautiously optimistic economic situation, but because many local directors and business owners appear to recognise the current period of relative economic stability and the need to use it to prepare for the future.

The prudence in such an approach is that political and economic storm clouds are building.  We are already seeing warning signs in supply chain bottlenecks, shortages in labour, and rising inflation. Households are facing increases in energy bills and borrowing has become more expensive due to higher interest rates in response to rising inflation, with the outlook being for further rises during 2022. 

To those businesses not using the opportunity to increase their businesses’ resilience to possible tougher trading conditions ahead, I say now is not too late to start. Your business may already be showing signs of financial distress without you realising it. There will be many reasons why a business is facing financial difficulties, and it is important to understand what is causing the distress, and whether it is likely to be a long- or short-term issue.  Reasons why a business is facing financial difficulties may include any of the following:

  • A director, business owner, or key employee retiring or becoming ill for a prolonged period;
  • When a business venture takes longer than anticipated to return a profit;
  • Imposing trading restrictions, such as the ‘lockdowns’ we have experienced;
  • Receiving a fine by one of the Island’s Regulators;
  • A key customer enters insolvency, leaving the company with unexpected bad debt; and
  • A loan may be called in unexpectedly or terms amended, meaning that the company must look for refinancing. 

Typically, the businesses’ accounts would be a good point to start assessing its resilience to possible tougher trading conditions ahead. Signs of a low level of resilience and potential financial distress can include any one or a combination of the following signs:

  • A decrease in demand for a business's product or services;
  • An increase in stock levels may be an early indication that incoming orders are reducing;
  • Lengthening creditor days;
  • Insufficient cash or working capital to pay its debts as they fall due;
  • Increasing tax debts (failure to pay tax liabilities such as NI, PAYE, and/or VAT often result in the Treasury being a large creditor with numerous debts to recoup; and
  • Lack of investment (in new technology, people, marketing).

The solution might be restructuring the business, or it may be that the optimal course is simply to limit further losses by ceasing to trade. But in all cases, taking control of the situation by seeking professional advice is the starting point. With the right professional advice and support, directors and business owners may be able to manage these situations, stabilising the financial position of the business and recovering a profitable trading position. 

Leonard is appointed to act as Official Trustee in Bankruptcy in the Isle of Man and is registered as a person suitable for nomination to the Court as Provisional Liquidator.