Pandemic support suppresses insolvency rates

Overall numbers of company and individual insolvencies remained low in August 2020, largely as a result of the government measures put in place in response to the coronavirus pandemic, but look set to rise sharply as support schemes end

There was a total of 778 company insolvencies in England and Wales, 43% fewer than in August 2019.  This decrease was largely due to a drop in the numbers of creditors’ voluntary liquidations (CVLs) and compulsory liquidations which fell by 39% and 67% respectively.

The total comprised 586 CVLs, 66 compulsory liquidations, 110 administrations,15 company voluntary arrangements (CVAs) and one receivership appointment.

The number of CVAs in August was 50% lower than in the same month last year, though the numbers were small. Administration fell by 38% in comparison to August 2019.

The sharp and sustained decline in insolvencies since the start of the pandemic is widely viewed as the direct result of initiatives including the coronavirus job retention scheme; government backed loans; and the prohibition of statutory demands and winding up petitions, as well as reduced operational running of the courts and reduced HMRC enforcement activity since UK lockdown was applied on the evening of 23 March.

Gareth Harris, restructuring advisory partner at RSM, pointed out that the current low levels of insolvency are masking soaring levels of redundancies and soaring redundancies and companies unable to pay make redundancy payments, with smaller companies particularly affected.

Harris said: ‘As employers of more than 60% of the UK working population, SMEs are now facing the realities of trying to continue trading without the furlough scheme, no further loan availability and sometimes insufficient cash to even make redundancy payments. 

‘This can leave some employees in limbo: unable to be paid their normal wages; unable to be paid redundancy payments; and unable to claim universal credit as they are technically still employed. 

‘We are working with one company currently who has over 150 staff in exactly that situation and where the only solution will be insolvency.  Even then it will be 6-8 weeks after insolvency before staff are likely to receive payment via the Redundancy Payments Service.

‘This is the true definition of a zombie company and if the government is reviewing further support measures, we would urge them not to forget about the many people caught in this unfortunate position.’

The August statistics show personal insolvencies fell to 6,359 in total compared to last month's figure of 7,330 and are significantly lower than August 2019's figure (8,892).

There was a 31% reduction in debt relief orders (DROs) and a 43% reduction in bankruptcies in August, compared with the same month last year. The reduction in bankruptcies was driven by a 36% fall in debtor bankruptcies and a 74% reduction in creditor bankruptcies.

Colin Haig, president of insolvency trade body R3, said: ‘There is no question that the pandemic is taking its toll on businesses and individuals, but this impact is not being reflected in the insolvency figures, yet.

‘The government's support measures have provided vital protection for businesses and consumers, but as they begin to wind down and this crucial safety net disappears, we expect to see more requests for personal and corporate insolvency advice and support.

'Our members are saying that requests for advice and support are becoming less restructuring-focused than they were at the start of the pandemic, and that enquiries for formal insolvency support are growing in volume, although they are still lower than might have been expected.

Insolvency and restructuring professionals expect enquiry levels to grow as the furlough scheme ends, and when CBILS loans become due for repayment early next year.’

To support businesses and individuals affected by the economic consequences of the pandemic and highlight the importance of seeking early advice, R3 has formed a new committee of senior insolvency and restructuring professionals, the Back to Business UK Committee.

This committee will work with R3's team to help produce guides on the profession, its processes, and the benefits of seeking early advice and help educate a range of audiences about insolvency and restructuring, how it can help businesses and individuals turn their financial situation around, and the contribution it makes to the UK economy. 

Useful links:

Monthly insolvency statistics

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