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Corporate insolvencies remain low – a cause for optimism?

Scott Bebbington considers today’s Company Insolvency Statistics for January to March 2021 and warns that now is the time for struggling businesses to take action.

After corporate insolvencies fell to their lowest level since 1989 last year, they continue to remain low so far in 2021. Official statistics released today show there were 2,384 corporate insolvencies in England and Wales in the first quarter, down 38% from Q1 of 2020 and 22% from Q4 2020.

It is not surprising to see corporate insolvencies continue to remain low, as the country went back into lockdown in January and this led to an extension of Government support and protections. It is easy to look at these statistics and reach an optimistic conclusion, however these numbers do not tell the full story.

The reality is that corporate insolvencies continue to be reduced artificially by the protections and support schemes made available, most notably the furlough scheme, the restriction on the use of winding up petitions and ban on commercial tenant evictions. There are a number of businesses that arguably would have gone into an insolvency process if not for these measures.

The support and protections provide valuable time for business owners to assess their options and look at ways of restructuring and rescuing their business.

On average there have been around 16,700 corporate insolvencies a year for the past 10 years. Since the first lockdown there have been around 11,000, suggesting that at least 5,000 businesses would have gone into an insolvency process if not for the support and protections. This ‘insolvency gap’ could, in reality, be much greater as a number of businesses have taken on additional debts just to survive lockdowns, potentially pushing them towards ‘zombie’ business territory.

The roadmap for reopening the economy post-lockdown provides optimism for business owners and it is clear there is substantial pent up demand, but it also provides some finality on when and how the support and protections that have kept insolvencies artificially low will be withdrawn. When you couple this with repayments on Covid support loans starting up, there is a very real risk that a number of businesses will find themselves in a position where they are unable to generate sufficient funds to deal with the debts built up during lockdowns. At this point, I think the ‘insolvency gap’ starts to unwind – and this points to an increase in corporate insolvencies in the months ahead.

The support and protections provide valuable time for business owners to assess their options and look at ways of restructuring and rescuing their business. This is valuable time they will not have once protections are withdrawn.

I would urge business owners to use this time to continually monitor business performance and be proactive in seeking insolvency advice where necessary, rather than adopting a wait-and-see approach. There are a number of restructuring and rescue procedures available to help turn struggling businesses into viable ones in the long term, and proactive advice increases the likelihood of this. When the support is withdrawn it is inevitable that creditor pressure will increase, and this limits the options available for businesses, with complete closure becoming the more likely outcome rather than rescue.

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FEATURING: Scott Bebbington
Scott joined Francis Clark Business Recovery as a trainee in 2012 having previously graduated from Cardiff University. He qualified as a Chartered Accountant in 2016.… read more
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