The Insolvency Service has published the latest company insolvency figure for England & Wales which indicates that the total numbers of company insolvencies in Q1 2020 decreased, when compared with the previous quarter and the same quarter in the previous year (Q1 2019).
The figures largely pre-date the Government lockdown and wider impact of the Coronavirus (COVID-19).
Total company insolvencies in Q1 2020 decreased by 8.5% from Q4 2019 and also decreased by 8.5% from the same quarter in the previous year. CVLs, the main driver for all company insolvencies, decreased by 10% from Q4 2019, and by 6% when compared to the same quarter in the previous year.
The overall trend for all company insolvencies continued to be driven by the volume of CVLs, though except for compulsory liquidations, there were also decreases seen across all other types of company insolvency.
In Q1 2020, there were a total of 3,883 company insolvencies as a result of: 2,708 Creditors’ Voluntary Liquidations (CVLs), 701 Compulsory Liquidations, 404 Administrations and 69 Company Voluntary Arrangements (CVAs) • There was one receivership.). The remaining 12% was made up of all other types of company insolvency.
Administrations decreased by 13% from Q4 2019, and by 8% from the same quarter in the previous year. CVAs decreased by 10% from Q4 2019, and by 26% when compared to the same quarter in the previous year. Compulsory liquidations increased by 1% in comparison to Q4 2019 but overall, they have decreased by 15% since Q1 2019.
Responding to the figures Duncan Swift, Past President of insolvency and restructuring trade body R3, said “The surprising decline in levels of corporate insolvency in Q1 2020 is partly reflective of the improving post-Election business climate, which was abruptly curtailed by the COVID-19 pandemic.”
“However, today’s quarterly and year-on-year decrease in corporate insolvency numbers is highly unusual given the circumstances and climate,and very unlikely to last. The impact of the coronavirus on every aspect of the business world is hard to overstate, and almost all companies, from multinationals to microbusinesses, have been affected.”
“Given the role of the courts in some corporate insolvency processes, as the Insolvency Service notes, the Q1 statistics may well have been artificially suppressed, to a degree, due to the curtailment of normal working hours by the courts. We may well see a backlog of cases coming through in future releases.”
“Businesses have been affected by the continued uncertainty around Brexit and the future of the UK’s trading relationship with the EU, with some seeing a decline in demand from customers in Europe, while others have held off investing in staff, plant or stock until the landscape looks clearer. One unexpected silver lining, however, is that many companies maximised their working capital facilities with their banks and lenders before the departure date of 31 January, in anticipation of any Brexit-related disturbances to business patterns. This will provide a cash cushion that will be helping many to keep their companies afloat in the wake of the pandemic, and its huge impact on cashflow.”
“Companies have adapted to the current supply and demand crisis: from forecasting cashflow and putting outgoings under the microscope, to setting up new ways of working for staff members where possible, to talking with suppliers, creditors and funders to try and find compromises or agree payment holidays, there are many ways that business owners have demonstrated their creativity and crisis management skills.”
“Government support on an unprecedented scale has been offered to companies and employees via the employee support scheme, state-backed business loans and grants, the suspension of business rates, a VAT holiday, the suspension of evictions from commercial properties for non-payment of rent, and so on. All of this is welcome, but it is clear that it will not have been enough to keep every company afloat, especially those which had entered the crisis period with existing debt problems.”
“Many members of the insolvency and restructuring profession have changed their working practices as a result of the coronavirus, but despite that the profession stands ready to help, providing practical and immediate advice and support for directors facing circumstances unimaginable just a few short months ago. Seeking out a licenced and reputable insolvency and restructuring expert for their input and guidance on the best steps to take to protect a business may be the key to coming out the other side in a position to take advantage of any signs of economic recovery, so do not delay if your company has been impacted.”
Federation of Small Businesses (FSB) National Chair Mike Cherry said “These figures just go to highlight the scale of the challenge that small businesses right across the country are facing.”
“There is a huge package of support available to those who need it, and in most areas, that package is doing its job in giving small firms who are facing difficulties the help that they need. But there is always more that can be done.”
“The cash grants being issued by Local Authorities are reaching small businesses, but for many councils1, at least a third of small firms are still waiting to get the money into their hands. Councils must not delay if they are to prevent the collapse of thousands of small businesses.”
“Areas such as the bounce back loan scheme which will go live on Monday (4 May), must have applications processed as promised within 24 hours.”
“Crucially, the Job Retention Scheme, which is helping to keep money in the pockets of employees while safeguarding the long term future of small businesses, is doing a robust job. But for certain sectors, the restrictions on gatherings and the scale of the lockdown will mean that some staff will face the possibility of furlough for a lengthy period.”
“That is why the Government must continue to constantly provide support in this way until the crisis ends. But it’s vital that as some industries do return to work, in what is likely to be done in stages, that the Job Retention Scheme reflects that too. Business owners should be able to bring full time staff back to work for a few days a week – whilst still using the furlough system for days when staff are not required – as they gradually resume business as usual.”
“These are hugely worrying times for small businesses, and for many this is going to be a difficult period for much of the year, if we want to prevent more small firms who are the backbone of the British economy, from going under, then the right support must always be available.”
Graham Bushby, Partner and National Head of RSM’s restructuring practice, said “These figures are not particularly surprising following on from the general election in December and generally positive trading conditions at the start of 2020, but these conditions feel like a world away.”
“Circumstances have changed experientially since the back end of Q1. Initial wide-spread predictions were that we would see an early spike in administrations. Yet these haven’t materialised, or not nearly to the same extent as was forecast, largely due to the unprecedented government-led counter measures installed at the outset of the UK-wide lockdown, that have allowed organisations to continue operating.”
“These extraordinary government measures are praiseworthy, but the reality is that they may just be kicking the can down the road. Deferring tax payments or taking out a CIBIL loan will help in the short term, but this is money that will still have to be paid back in due course. These measures may only act as an avoidance or delaying measure, unless other restructuring options are pursued.”
“We predict that the economic downward curve will be steeper than in 2008, with a consequent double spike in insolvencies, as we exit the lockdown, and then again in say 6-12 months’ time, so Q4 and Q1. The 1990’s and 2008 recessions show us that insolvencies, whilst initially increasing, do not peak until around 12 months after the recession. However, predictions of numbers approaching a million insolvencies as reported in recent weeks, seems a major exaggeration given that over the course of the 2008-13 period, total corporate insolvencies were less than 114,000. ”
“The major banks face an unenviable balance between lending responsibly, arguably conservatively, and protecting their own futures, versus facing criticism for a lack of support. For those companies who may be on the cusp of survival, it is vital that they act now and really take swift and often drastic measures wherever possible and effectively go into survival mode. Even for those that are more secure, will need to plan for a very different trading environment as we exit the crisis. Many may still need some form of restructuring process on the way out of the recession, focusing not only on how to survive to trade another day, but how to prosper longer term.”
“The Covid-19 crisis has caused economies across the globe to adopt self-distancing as the de-facto international global public health policy to mitigate the spread of the disease. Unfortunately, that policy requires putting national economies on hold to save lives. Unlike in 2008 when companies continued to trade, albeit with limited means, this time the taps have effectively been turned off, for most. Re-starting the economy is going to be difficult, with many businesses facing new challenges around how they practically operate and very different consumer demands and requirements.”