Company directors who have kept paying themselves in dividends despite the impact of the pandemic on their firms’ profits could have to pay them back if their businesses fail.

That’s the warning from Alexandra Withers, North East chair of insolvency and restructuring trade body R3, after the latest corporate insolvency statistics for England and Wales showed yet another significant month-on-month fall.

Corporate insolvencies across the UK decreased to 856 in October 2020, compared to September’s figure of 925, and remained well below October 2019’s figure of 1,485.

But with temporary measures stopping creditor enforcement actions against debtors due to expire at the end of 2020, Alexandra Withers believes the first few months of the new year could see a significant rise in company insolvency numbers.

And this trend could cause additional problems for directors who haven’t adhered to the rules around dividend payments, which must be drawn from a company’s ‘distributable profits,’ with consideration having been given to its most recent accounts.

Alexandra Withers says: “The continued low levels of corporate insolvency can once again be traced back to high levels of Government support and widespread creditor forbearance, both compelled and voluntary.

“With many creditors at present prevented by law from taking enforcement action, the usual triggers for seeking advice on dealing with an urgent debt problem are largely absent.

“With corporate insolvency numbers still far below their pre-pandemic levels, worries are mounting within the profession that a wave of business closures could be on the horizon, made up of both companies which would have become insolvent in the normal scheme of things, along with those businesses dealt a fatal blow by the pandemic.

“Gravity can’t be defied forever, and with temporary measures stopping creditor enforcement actions against debtors due to expire at the end of the year, the first few months of 2021 could turn out to be difficult ones for large swathes of businesses which have built up arrears with landlords, suppliers, or the taxman.

“A significant proportion of directors of limited companies take their income in dividends, rather than as straightforward salary, so that it is subject to lower rates of tax, but those that haven’t taken account of the present trading circumstances and have continued to pay themselves dividends at the same level as last year, need to tread carefully.

“If their company enters an insolvency procedure, the insolvency practitioner handling the case will look at whether any dividends were justified – and if not, they could pursue directors for repayment.”

Personal insolvencies increased to 11,939 in October 2020 compared to September’s figure of 7,458, and were higher than October 2019’s figure of 10,030.

Alexandra Withers, who is an associate solicitor in the insolvency department of Short Richardson & Forth Solicitors in Newcastle, continues: “The state of people’s personal finances has an obvious impact on what they feel comfortable spending in the shops – even with the furlough being extended until the end of March, job losses are now mounting and many people will be entering the festive season in a precarious financial position.

“With constraints on usual levels of pre-Christmas spending, in sectors from bricks-and-mortar retail to hospitality, there is a danger that reduced consumer outlay, exacerbated by personal financial uncertainty, leads to more pain for businesses, who will then be forced to consider more redundancies, in a vicious circle effect.

“Debt problems can quickly turn from a snowball to an avalanche. The importance of speaking to a qualified and regulated advisor at the first signs of trouble cannot be overstated, to help individuals or business owners find a way back to financial stability.”