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The end of financial support could bring mismanagement claims

Shamilee Arora

Shamilee Arora

The pandemic brought socialising and ‘normal’ working life to an abrupt halt, yet there has been relative stability in the financial markets.

The current state of relative economic calm is a product of the unprecedented government support packages. However, as we edge closer to the autumn of 2021, with government support about to be turned off, there is a prospect of financial uncertainty. 

Not only is it likely that businesses will go into liquidation, but trustees and financial advisers are also likely to find themselves under increased scrutiny from those whose funds they hold within their grasp. 

An impending storm

Financial volatility in the markets, in particular the market crash at the very beginning of the pandemic in March 2020, has had varying impacts on investment portfolios.

Although equities have recovered, sizeable cash injections to the markets in the form of furlough and corporate support packages have left debt markets and interest rates tottering towards the dangerous territory of negative interest rates.

This has made a sluggish bond market even less attractive, while equities and housing markets have continued to soar. 

Despite the initial panic at the onset of the pandemic in March 2020, the aforementioned government support packages have, at least for the time being, staved off an onslaught of insolvencies.

That is not to say there have been no victims in this crisis – the troubled airline FlyBe and retail giant Arcadia Group come to mind – however, it is fair to say that financial markets have stabilised in light of government support and steadying demand following vaccine roll-outs. This means we have not, as yet, seen a full-fledged financial crisis with a series of corporate failures.

In fact, a World Bank study found that formal insolvencies dropped in the second and third quarters of 2020, likely as a result of government support, payment holidays and suspension of insolvency procedures in various jurisdictions.

Pundits posit, however, that the situation is likely to change following the end of the government support, which is slated to be in autumn 2021 in various countries including the UK, Germany and the US, among others.  

Unravelling the past

As a company or business is wound up and liquidated, creditors, appointed liquidators and auditors are tasked with combing through the relevant entities’ business and finances. This tends to be fertile ground for the discovery of potential financial mismanagement and irregularities.

The recent case of the construction behemoth Carillion typifies such a scenario. The government liquidator of Carillion has announced that it expects to make a claim in the region of £250m against KPMG, the auditors of the company, for having failed to uncover the financial woes of the company and review the accounts properly.

Moreover, financial mismanagement is often discovered long after the fact, and more usually, it is discovered when the effects are manifested in the form of lost capital, falling share prices or insolvency.