UK insolvencies hit pre-pandemic highs

For the first time since lockdown measures were introduced, monthly insolvency filings were higher in 2020 than the same month a year before.

The Insolvency Service reported 1,228 registered company insolvencies in December 2020 with the bulk of those being creditors voluntary liquidations (CVL). Duncan Swift, past president at R3 says given the general mood of the industry this comes as no surprise.

“The volume of inquiries and the nature of conversations are moving increasingly towards implementing formal insolvency procedures,” says Duncan Swift, past president at R3 “The tide is turning.”

However, Swift cautions against reading too much into one month’s data.

“Whether this will be a sustained uptick in corporate insolvency number, it’s too early to say.

“December numbers tend to be on the low side by the nature of it being a holiday month. One swallow doesn’t make a summer, or a winter in this case. It will only be after the January 2021 statistics where we will know if we got a trend developing”.

The Insolvency Service did note in its findings that the December 2019 statistics were also low compared to the annual average and with volatility being high in month to month reporting, it would be difficult to extrapolate trends just based on this.

Insolvencies have been depressed since the beginning of the pandemic, with the government putting in place both legal and financial measures to help keep businesses afloat and trading. This includes a moratorium on winding-up petitions, a suspension of wrongful trading and numerous financial support schemes like the coronavirus job retention scheme (CJRS).

“One of the triggers for companies going into administration is the threat of a creditor taking action or the risks associated with trading whilst insolvent”, says David Baxendale, partner at PwC. “Some of the measures in that area have been temporarily suspended, which has an immediate knock-on impact in the level of insolvencies. That’s a trend we’ve seen since those measures were introduced back in March.”

However, even if December’s numbers were an outlier, insolvencies practitioners say it is inevitable that insolvencies will rise.

“It’s very much a question of when, not if we will see an increase in corporate insolvencies in the UK”, says Simon Edel, partner at EY.

“When businesses start operating again, a lot of these companies are going to need restart capital, and  it’s going to hit cash flows. There are a lot of arrears which need to be settled, and the cost of restart operations by new stock, pay suppliers, that’s all going to require cash. I suspect that we will see an increase in corporate insolvencies following that.”

Practitioners say there are signs support measures could be extended again until June but without an extension, the moratorium on winding up petitions is set to expire at the end of March and CJRS scheduled to end April 30.

Practitioners starting to use new tools

Along with support to businesses, the government also gave insolvency practitioners more means with which to help businesses through insolvency and restructuring procedures. Practitioners can now utilise a moratorium process and a new restructuring plan.

The moratorium process would allow distressed businesses creditor protection while they assess their own viability, subject to the oversight of a monitor. The new restructuring plan, allows for a cross-class cramdown, in which a judge can approve a restructuring plan despite the objections of a dissenting class of creditors as long as they would be no worse off in alternate arrangements.

Since the introduction of these two tools in the Corporate Insolvency and Governance Act 2020, on June 26 to December 31, only four moratoriums have been obtained and two restructuring plans approved by the court.

The government expected a higher uptake on the use of these tools, the moratorium in the range of hundreds if not thousands and the restructuring plan in the low hundreds. Swift says that expectation was based on the assumption of a V-shape recovery.

“The moratorium was expected to be a tool used for circumstances where the pandemic demand or supply shock in terms of cash flow effect was V shaped. We don’t know what shape the recovery will end up taking but V-shaped it has not been.

“It’s unsurprising that the moratorium is not being used to the extents of the few hundreds or possibly thousands per annum that was initially expected.”

Edel expects more use of both these processes as government support begins to taper off and alongside the more established tools of administration and Company Voluntary Arrangements (CVA).

“If you can make use of the moratorium or restructuring plan, they should be considered in equal measure alongside administration and CVAs. Insolvency practitioners consider all procedures and what’s best for a certain situations or circumstances at hand. All the tools are available.”