2020 annual insolvency figures – what do they tell us?

Despite the doom and gloom of the pandemic year of 2020, the Corporate and Personal Insolvency statistics for England and Wales appear to be a surprise.  It is only when you unpack the reality of the figures that perhaps the true extent of the problem that companies and individuals in the UK are going to face over the next year or two becomes apparent.

Corporate Insolvencies

• There were 12,557 underlying corporate insolvencies in 2020 – a fall of 27.1% from 2019’s figures
• Underlying corporate insolvency numbers increased by 16.9% between Q3 and Q4 2020.

On the surface fewer corporate insolvencies is good news, particularly when the news has been full of iconic UK brands falling into insolvency.  However, it is not a surprise when you consider the significant support given by the Government since March 2020 and the almost complete hold-up of creditor’s ability to take action with the suspension of compulsory liquidations, which has effectively been in place since May 2020 with the introduction of the Corporate Insolvency & Governance Bill, which came into force in June 2020.  The almost wholesale suspension of compulsory liquidations is set to remain in place until 31 March 2021, but if the coronavirus lockdowns and uncertainty remain in place it may well be extended beyond this date.

Interestingly, corporate insolvency levels increased by nearly 17% between Q3 and Q4 2020, which suggests that the number of creditor’s voluntary liquidations is increasing as companies run out of cash.  However, the figures are still lower than this time in 2019, which may mean that more companies are holding off making this decision.

Clearly, the level of government support and the lack of pressure from creditors is keeping the insolvency figures arguably artificially low.  This may prove to be a problem as we get further into Q2 and Q3 of 2021.  If the government lifts the current suspension there will be a significant number of companies that have more than reached the end of their cash runway.  This coupled with difficult trading in many sectors and the ongoing impact of Brexit induced changes will start having a substantial effect on business.  These companies will be unable to service their debts and are likely to face action from creditors owed substantial sums.  The predicted cliff edge for companies has yet to materialise, but this is predominantly due to the extension of government support and the lack of ability for creditors to press for payment.   In the next few months, deferred debts will start requiring repayment, particularly VAT and some rents, together with repayments starting on CBILs and bounce back loans, which will tighten any existing breathing space.

As lockdowns lift and the immediate threat from coronavirus eases due to vaccinations and life starts to return to something more resembling normal, insolvency levels are expected to start rising as businesses enter insolvency processes or announce restructuring and particularly if compulsory liquidation again becomes an easy option.

Company directors need to start planning now and take early advice from qualified sources if they are worried or see signs that their company is starting to struggle.

Individual bankruptcies

• 111,424 person insolvencies in 2020, which is a fall of 8.6% on 2019’s figures.
• Personal insolvency numbers increased 57.2% between Q3 and Q4 2020

There has been a year on year decreased generally in personal insolvencies.  Bankruptcy and debt relief orders tend to be a more accurate reference point for levels of individual indebtedness and were lower following the start of the pandemic in Q2 onwards when compared to the same period in 2019.

It is highly likely that the partial closure of courts during late March, April, May  and June in 2019 and the reduced capacity thereafter has managed to suppress the bankruptcy figures.  Courts are running at significantly lower capacity than comparable rates in 2019.  Anecdotally, bankruptcy petitions are taking up to 9 months to list a hearing in some county courts.  This is not good news for creditors that have traditionally viewed a bankruptcy petition as relatively swift.  However, it is offering cash strapped individuals breathing space to try and make appropriate arrangements.  Likewise, during Lockdown 1 most county court hearings were kicked off into the long grass.  This frustrated creditors, but again gave individuals room to try and avoid a bankruptcy order by negotiating with their creditors.

The situation has changed in Q3 and Q4 where we see an increase in personal insolvencies.  This may be an indication of the damage the pandemic has caused to individual personal finances and is starting to translate through to the official insolvency figures.  Moreover, the bankruptcy hearings listed during Lockdown 1 would have started being relisted in Q3 and Q4.  The effect of the pandemic on individual finances has been diametrically opposite.  The lucky ones have been able to save money and repay debts.  However, millions more have had to borrow to get through these times and it is these individuals who are more vulnerable to financial problems caused by a missed benefit payment, unexpected bills or redundancy.

The furlough scheme and mortgage holidays have helped some, but these have not been available to everyone and will not last forever.  Unemployment is already at levels not seen since 2016 and confidence remains low as people worry about their financial position and the current and future health of the economy.

The government will be launching a new statutory Breathing Space scheme in May 2021, which means that people in problem debt will be able to access 60 days of protection from interest, charges and creditor action whilst they seek debt advice.  During this period people receiving professional debt advice will be protected.  Those receiving mental health crisis treatment will also receive the same protections until their treatment is complete.  The new scheme is due to go live on 4 May 2021.

Speak to our specialist Corporate Restructuring and Insolvency Solicitors.

As ever, if you are suffering from financial worries or are concerned, you should always seek professional advice. Email our team at insolvency@ibblaw.co.uk