Insolvencies drop in first quarter

The Insolvency Service’s latest report has found a drop in insolvencies in England and Wales for the first quarter of 2020.

The report found 3,883 insolvencies during that period. This is down by 8.5 percent from the previous quarter and by 8.5 percent on the same quarter in 2019.

The report indicates the primary cause of the drop in insolvencies was due to a decrease in the number of creditors’ voluntary liquidation which was down by 10 percent from the previous quarter. Other than compulsory liquidations, all other types of company insolvency were down.

“What’s been happening generally is that businesses had been holding its breath pending the outcome of the Brexit negotiations and the election in December 2019. There has been a bit of a bounce due to the fact that business knows that we’re definitely leaving the EU, giving more certainty for businesses future”, says Cathryn Williams, partner in the restructuring and insolvency team at Crowell & Moring.

In March, the government announced several initiatives including loans, payment and tax deferments, and grants in an effort to keep firms from going insolvent. Duncan Swift, Past President of R3 says that while these measures are helping businesses, the Q1 drop in insolvencies cannot be attributed to that.

“We’ll have to wait for future quarters’ insolvency statistics to really see how much of an impact the support measures are having.”

25 percent of businesses have reported a temporary cease in trading according to the ONS. It has also been made increasingly clear that a lifting of the lockdown will be gradual and not immediate. Williams says many businesses which have been “put on ice” may find it difficult to start trading again.

“Inevitably at the end of the lockdown when these businesses are seeking to recommence trading, they will be faced with a wall of debt.

“Some of them may have taken advantage of the business interruption loan scheme, the corporate financing facility, the bounce back loan scheme itself and etc. They may not have paid rents, they have got a rate rebate, they’ve got some holidays on taxes payable. Once they start trading again, they’re not going to have the income immediately to be able to deal with all of that debt.”

As the lockdown has moved from weeks to months, the government has continued to introduce new business support. Yesterday, saw the start of the Bounce Back Loans scheme, which provides 100 percent government backed loans of up to £50,000. Swift says it’s difficult to determine if this support is helping businesses survive or just delaying the inevitable.

“On the support measures, the big question is whether they help keep businesses solvent or simply act as a means of delaying insolvency for businesses who were on the brink of it in any case – but if it bides them time to review their business model, that might not be a bad thing.

“The corporate insolvencies reported since the lockdown started have predominately involved businesses that were in financial distress beforehand.

Williams and Swift agree that it is too early to tell if the UK will see a spike in insolvencies once coronavirus support schemes end. But with most government support schemes scheduled to end in June, Chancellor Rishi Sunak is under pressure to extend that support as the UK begins to emerge from lockdown.

“I think we have to acknowledge the fact that the support the Government has provided for companies has already been on an unprecedented scale. If the economy continues to suffer significantly in the long term, then the Government will need to consider what further measures it can take while having an eye on the state of the public finances”, says Swift.

“It may simply involve extending the measures already announced, such as 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.

“Another option would be to look at whether payment holidays for certain taxes could be introduced that would follow the example set by the VAT payment holiday.”