Insolvency rates may mean rise in company failuresby
The Insolvency Service’s monthly insolvency statistics recorded 1,011 registered company insolvencies in May 2021, a 7% rise as compared to May 2020 (946) though 25% lower than the number registered in May 2019 (1,352).
Since March 2020, UK business survival has trodden a thin line. Extensive government support in the early days of the pandemic has, as you’d expect, kept businesses that may have otherwise faced insolvency, afloat.
Indeed, official statistics show that in nearly every month since March last year, national insolvency figures reduced as compared to the same period in the previous year. In fact, in February and January this year, insolvency figures had approximately halved, to lows of 686 and 752 respectively.
Insolvency figures trending upwards
However, May 2021’s figures – though still low – did creep up as compared to May 2020. As well as recording 1,011 registered insolvencies, the Insolvency Service also reported 718 bankruptcies, 1,525 registered debt relief orders and 7,393 IVAs.
This is perhaps expected given that the government support available at this stage last year was still in full swing, whilst many of these schemes had begun to taper off by May this year.
What’s more, this is one of the first times over the last 12 months, other than December 2020, that insolvencies have crept above 1,000. Could we expect this to continue in the coming months, with insolvencies rising as support measures come to an end?
Keeping business afloat
First, it’s important to consider when these support measures will officially conclude. The government’s recent decision to postpone the lifting of all restrictions from 21 June to 19 July saw it extend certain support packages. The moratorium on commercial evictions, initially due to end on 30 June, will now stay in place until 25 March 2022 to “ensure that the sectors who are unable to open have enough time to come to an agreement with their landlord”.
Legislation is also due to be introduced to encourage negotiations through a binding arbitration process. Whether this will help tenants and landlords reach a workable solution remains to be seen; indeed, many landlords have stated that the government should have introduced the arbitration process far sooner, expressing their fears that extensions to the moratorium will continue to leave them facing rental arrears.
The government also recently announced that statutory demands and winding up petitions would remain respectively void and restricted for another three months – to the end of September 2021 - under the provisions of the Corporate Insolvency and Governance Act 2020. These measures, aimed at protecting businesses from creditors, were due to come to an end on 30 June. They have proved to be lifelines for many struggling businesses over the course of the pandemic, helping to stave off a potentially sharp rise in insolvencies.
The further extension may mean that the projected spike in insolvencies in July 2021 (being the month after these measures were due to end) will probably not now occur. The government has the ability to extend these measures further into 2022 if necessary, and a further three month extension may happen in this period, especially if Covid-19 restrictions remain in place. Yet, as with the eviction restrictions, it has also created a situation whereby many creditors are consequently struggling as a result of non-payment.
The measures have also propped up businesses that may have been likely to fall into liquidation regardless of the pandemic.
In February this year, the independent think tank The Resolution Foundation warned that the government’s Bounce Back Loan Scheme risked keeping unviable businesses alive, impeding “the reallocation of capital and labour” away from more productive companies; by keeping failing businesses going, otherwise successful businesses could reap the consequences once bank and government support is retracted. The long-term economic consequences of staving off insolvencies will be complex to say the least.
How will furlough affect figures?
The deadline for other support schemes is still fast approaching. In particular, the furlough scheme will begin to taper off from July, with government contributions towards wages dropping from 80% to 70% – employers will need to make up the remaining 10% themselves. The government’s contributions will continue to reduce until the scheme officially ends at the end of September.
Indeed, the number of people still on furlough has reduced significantly over the last few months. With the country gradually unlocking, figures from the Office for National Statistics (ONS) showed 1.8m employees were still accessing furlough support in May, the lowest number since the scheme started.
There’s no doubt that the scheme has played an important role in keeping many businesses financially viable, particularly in sectors unable to operate under lockdowns, such as hospitality. Come October, should the scheme wrap up completely and wage bills increase sharply, it seems inevitable this will have a direct impact on insolvency levels.
Taking all of this into consideration, how might we expect insolvency figures to look in the coming months? It’s a mixed bag to say the least. The level of government support is reducing, so it’s likely that insolvency figures will gradually reflect an increase as compared to 2020. However, if the country stays on course to unlock fully, coupled with the extension of certain support measures, this may keep the position reasonably stable.
What’s certain is that the pressure on businesses, especially those in the most affected sectors, will remain high, and many will be in need of advice on their solvency position. It should not be assumed that every business that manages to hold on until unlocking will be in a viable position to survive.
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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...