'Dramatic' plunge in corporate insolvencies

The government’s coronavirus support measures have had a dramatic impact on corporate insolvencies, which have fallen to their lowest level for four years, according to research by KPMG

The firm says its analysis of notices in The Gazette show 274 companies in the UK entering administration in the second quarter of 2020, a 28% fall from the first three months of the year, and the lowest point since Q1 2016, when there were 266 administrations.

The quarter was almost entirely a period of lockdown, with plummeting consumer spending, and largely overlapping with a GDP fall of 19%.

Blair Nimmo, head of restructuring at KPMG in the UK, said: ‘Clearly government measures have had a dramatic impact.

‘The effect of putting parts of the private sector into a quarter of virtual hibernation has not just severed the link between a fall in economic activity and a rise in corporate insolvency, it has flipped it on its head.’

Nimmo said the insolvency data showed a markedly Covid-19 shaped picture, with administrations in healthcare dropping by 64%, a far greater extent than other sectors.

‘This fall is only exceeded by that in the technology sector, in which administrations fell by 71%. This perhaps reflects the lockdown related growth in reliance on technology by consumers and businesses alike, putting tech more firmly than ever at the heart of many business’ operating models.

‘Conversely, passenger transport, which broadly refers to coach operators, is one of the few sectors to see a rise in insolvencies, of 67%, highlighting that even the government measures could not give sufficient headroom to some companies that were dependent on our ability to travel,’ he said.

However, Nimmo pointed out that the severe decline in the financial health of the retail and casual dining sector is not reflected in these figures.

‘These sectors were struggling pre-Covid-19 and what you have seen since the easing of lockdown as they emerge from hibernation is a raft of closures, CVA proposals and administrations.

‘These are likely to continue and indeed accelerate as some of the government support schemes wind down,’ he said.

Nimmo predicted a strong rise in insolvency numbers in the coming quarter.

‘Businesses are emerging into a quite different landscape. They may be required to navigate unforgiving territory, combining the withdrawal of government support, local lockdowns, consumer caution and shrinking margins due to new health and safety regimes and reduced productivity.

‘The months ahead will see real pressure on cash flow as a consequence of the working capital demands of re-opening, whilst at the same time servicing and repaying new bank facilities, repaying tax arrears and the costs of any required redundancies. 

‘Managing a ramp-up in business activity in such an uncertain economic environment will be one of the biggest challenges many directors have ever faced,’ he said.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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