CORPORATE INSOLVENCIES HAVE INCREASED – BUT IT’S NOT A TSUNAMI

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CORPORATE INSOLVENCIES HAVE INCREASED – BUT IT’S NOT A TSUNAMI

Sonia Jordan is a restructuring and insolvency partner at IBB Law LLP.

It was not only the usual doomsayers who were predicting a pandemic induced tsunami of insolvencies by Q4 2021; Many stakeholders as well as the restructuring and insolvency profession were concerned that the challenging business environment created by extended and repeated periods of lockdowns coupled with the effects of Brexit would put untenable strain on many businesses.

The latest company insolvency statistics published by the Insolvency Service on 28 January put these predictions into sharp relief:

England and Wales, four-quarter rolling rate per 10,000 active companies, Q4 2011 to Q4 2021

Sources: Insolvency Service (compulsory liquidations only); Companies House (all other insolvency procedures)

The figures, which show the results for Q4 over 10 years ending December 2021, show a 11.2% increase in corporate insolvencies (14,048 in total) compared to December 2020 but yet the December 2021 figure is still significantly lower than the pre-pandemic figure of 17,166 for December 2019, in percentage terms, a fall of 18.2%.

So while we are not (yet?) seeing a tidal wave of insolvencies, December 2021 saw the highest annual number of Creditors’ Voluntary Liquidations since 2009 (i.e. during the post-Lehmans Global recession) representing 90% of all corporate insolvencies. The surge of these voluntary liquidations in the second half of 2021 (62% of the total number of voluntary liquidations were registered in the second half of the year) seem to demonstrate the knock on effect of the phased withdrawal of the Government led measures put in place to support companies during the pandemic. The market disruptions and economic downturn have left many businesses with significant reduced profitability and facing long term and possibly permanent changes to their economic environment. The impact on businesses of contributing factors such as the soaring price of raw materials and increases in energy prices which cannot always be passed on by way of increased sales prices, supply chain issues, labour shortages, decreased footfall on the high street and in industries such as hospitality, widescale cancellations, are reflected in the statistics by the increase in liquidations.

In contrast to the rise in voluntary liquidations is the 48% drop in companies entering into administration in 2021 compared to 2020 and an even bigger drop of 56% when compared to the pre-pandemic 2019 period.

Administration is often the insolvency tool used to ensure the survival of the business of the company (if not the company itself) usually by way of the sale of that business as a going concern often to a trade competitor or to the existing management. We wait to see whether the Q4 2022 results will reveal an increase in these accelerated sales processes. At this point, the sharp decline in this ‘business rescue’ procedure would suggest that directors are opting instead to close the business and walk away by their own choice via a voluntary liquidation rather than by force as the result of a winding up order now that prohibitions against winding up petitions have been largely relaxed.

This article was first published in the Business Voice magazine, Spring 2022 edition.