Company insolvencies decrease, but will this trend continue?by
Government insolvency data released this month showed a 43% decline in company insolvencies in August 2020 as compared to August 2019, continuing a trend seen in the statistics for the previous quarter. But will the tide turn in the midst of Covid-19?
For the last month, government data revealed a fall in company insolvencies of some 43% compared to August 2019. Company voluntary liquidations were down by 39%, compulsory liquidations down by no less than 67%.
On the face of it, those are remarkable statistics given the deep economic impact Covid-19 has had, and reflected the trend seen in the previous quarter. With the impact of the coronavirus, and regular news of high profile casualties – on the High Street in particular – how can this be possible? Whilst this trend can be explained, it is not one that can continue for much longer.
Support schemes prop up businesses
Recent government support schemes, combined with the temporary restrictions on most winding up proceedings and relaxation of wrongful trading provision, have clearly gone some way to prevent a spike in business failures, which would see even more job losses and further undermine confidence in the economy.
Given these measures, it was inevitable that businesses that would otherwise have gone to the wall have survived.
Furlough ends, insolvency rises
It is equally inevitable that these insolvency levels will rise again. Government support has been provided through extensive borrowing on a scale not seen in a decade. By degrees, the furlough scheme will come to an end and wage bills will increase again.
The sting in the tail is that unsurprisingly, for a scheme introduced so quickly at a cost of some £35bn, it is estimated that around 10% at least of these payments have been made in error or claimed fraudulently.
Those committing fraud (for whatever reasons, from pure personal gain to propping up an ailing company) will be first in line for recovery action, but the mistakes will have to be recovered as well, to the extent the recipients can pay back.
Loans will have to be paid back, accrued debts, tax, national insurance and pension contributions will need to be settled, in circumstances where some businesses will have had little to no income for six months and cash has become more scarce.
The restriction on winding-up proceedings is currently due to last until the end of this month. It may be extended, but at some stage, creditor action will increase - and creditors will be ready to go as soon as the opportunity arises.
The other side of the coin
Creditors must be given the opportunity to pursue claims, as this is not a binary situation. For example, landlords owe money too and may be at risk of collapse, as has been seen with major retail shopping centres. Protecting businesses in distress cannot go on forever.
As and when the supporting safety car departs the race track, it won’t be a case of straight back to full speed, as consumer confidence will be brittle and the signs are that sectors such as retail and airlines will only be seeing a gradual return to pre-pandemic levels of activity, probably from 2021 at the earliest. That’s some way off yet, assuming no further setbacks in the form of a second wave or a national lockdown.
So, with that in mind, when will insolvencies rise again? Whilst we are all looking into an uncertain future, we expect that as the support drops away, more businesses will be seeking advice on their insolvency position, either as a result of analysis of reasonable forecasts for their business or due to creditor pressure and action.
For some, solutions will be found through restructuring, disposals and/or renegotiation with creditors, for others it may be a formalised procedure such as winding-up or administration. It won’t happen overnight, but by the end of this year, we expect to see the declining trend in insolvencies being reversed.
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Stuart Evans is a partner in commercial litigation and expert in accountancy-related disputes at law firm BLM, with over 30 years’ experience both in the UK and overseas. He has acted for multinationals, PLCs, SME's and high net worth individuals, and has significant experience in devising...