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Corporate and personal insolvency: a mixed picture

Author: ICAEW Insights

Published: 12 Aug 2022

With the end of COVID-19 support measures, the true picture of insolvencies is beginning to emerge, with corporate insolvencies rising at their fastest rate since 2012, but individual insolvencies lower.

During the pandemic, insolvency figures in England and Wales were at an historically low level for an economic crisis due to the government support measures such as furlough and Bounce Back Loan schemes. Since the government has gradually withdrawn those measures, corporate insolvencies have rebounded almost to pre-pandemic levels. This indicates that the support measures masked the real corporate insolvency environment with suggestions that many so-called zombie companies were being artificially kept afloat.

Angela Crossley, Director of Strategy, Policy and Analysis at the Insolvency Service, says: “The main driver of corporate insolvency numbers at the moment is creditors voluntary liquidations. It’s not clear at this point whether that is a balancing up of all the companies that weren’t really viable but managed to keep going during the lockdown because of the pandemic related government support, or whether there is a longer-term upward trend that will continue.”

Official data shows that between 1 April and 30 June 2022, there were 5,629 registered company insolvencies, comprising 4,908 creditors’ voluntary liquidations (CVLs), 368 compulsory liquidations, 320 administrations, 32 company voluntary arrangements (CVAs) and one receivership appointment.

The data shows that despite surviving the pandemic, business owners have begun acknowledging defeat in the struggle to keep their companies afloat with CVLs becoming the most popular insolvency option.

Christina Fitzgerald, President of insolvency and restructuring trade body R3, says: “The figures show the highest levels of corporate insolvency since 2012. This has been driven by an increase in all forms of insolvency process – but CVLs have peaked to their highest recorded figure of 4,908, suggesting that many directors are opting to close their businesses as they lack confidence in their trading prospects in the current climate. 

“The steady rise in compulsory liquidations we’ve seen since the start of the year also suggests that creditors are now making use of their power to issue winding-up petitions to try and claw back monies they are owed.” 

After seasonal adjustment, the number of company insolvencies in Q2 2022 was 13% higher than in Q1 2022 and 81% higher than in Q2 2021, the Insolvency Service said.

However, the number of individual insolvencies in April to June 2022 was 10% lower than in the first quarter 2022 after seasonal adjustment. Numbers of individual voluntary arrangements (IVAs), debt relief orders (DROs) and bankruptcies were all lower. But total individual insolvencies were 7% higher than in Q2 2021.

R3’s Fitzgerald says: “The quarterly fall in personal insolvencies is down to a reduction in bankruptcies, DROs and individual voluntary arrangements (IVAs). However, personal insolvency levels are still higher than they were a year ago. 

“DRO figures have increased by 32% from the same time last year – and this has been mirrored by a 31% reduction in bankruptcies, which suggests that those with lower levels of debt and assets are facing the pinch at the moment, rather than those with businesses and larger mortgages, who are more likely to use the bankruptcy process to deal with their financial problems.” 

Personal bankruptcies are likely to continue to increase, too. R3’s Fitzgerald says that with inflation continuing to rise, and a further jump in energy bills in October, the winter months are likely to be very tough for many individuals and families across the country. 

“Many more may be forced to consider an insolvency option to help resolve their financial issues,” she says.

Crossley says: “Generally, there’s a time lag between people getting into financial difficulty and that translating into them accessing an insolvency solution.”

Predictions of an imminent recession and ongoing financial pressures on households and businesses means the worst is still to come, insolvency experts predict.

Andy Taylor, Partner and Head of Restructuring at Shakespeare Martineau, says: “There are a lot of businesses with endemic problems they have been sitting on for months and, in some cases, years. If things continue as they are, we expect to see an increase in business failures as they attempt to address their underlying issues and battle tough trading conditions.”

This worrying landscape for businesses is further backed up by new research from Begbies Traynor’s Red Flag Alert report, which has provided a snapshot of British corporate health for the past 15 years. It reveals the financial strain thousands of British businesses continue to face.

The report showed a rise in the number of businesses in critical financial distress over the last year, with a 37% increase in Q2 2022 compared to Q2 2021.

Bars and restaurants, general retailers and construction sectors are hit hardest and are the major trigger in this increase, with year-on-year rises of 70%, 48% and 36% respectively.

There was also a considerable increase in the use of County Court Judgements (CCJs) to collect corporate debt – with CCJs in 2022 approaching the total for the whole of 2021, suggesting creditors are becoming more assertive in recouping debts.

As for what lies ahead, current economic conditions indicate that insolvencies – corporate and personal – won’t fall back.

Crossley says: “There are no real econometric models to cater for a global pandemic scenario and what might happen to the economy. And of course, there are now other factors at play – energy prices, the war in Ukraine and so on. So, the nearest measure that our people look at for what might follow this global economic shock is what happened after the financial crash in 2008. There were very different factors then, but case numbers went up. Many people would say that with rising inflation and energy costs and the general cost of living going up, we will likely see an increase in insolvencies. I think that’s a reasonable assessment, but we will have to wait and see.”

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