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COVID-19 is causing significant Financial Distress for Business – So why are Company Insolvencies so low?

Introduction

Since the start of the Coronavirus crisis, the Insolvency Service has been issuing monthly statistics in addition to the usual quarterly reports, in order to provide more timely indicators of the impact that COVID-19 is having on insolvencies.  Whilst the numbers are presented as “provisional” they nevertheless indicate some surprising trends and in this article we take a look in particular at corporate insolvency cases.

Company Insolvencies

In June 2020 there were 732 company insolvencies in England & Wales, broken down as follows:

  • 557 creditors’ voluntary liquidations (CVLs)
  • 61 compulsory liquidations
  • 100 administrations
  • 14 company voluntary arrangements (CVAs)

These figures represent a 50% drop in volumes compared with the same period in 2019 and continue the trend seen in April and May.  CVLs were down by 45% but the biggest drop was in compulsory liquidations, which fell by 78%.  The latter has been driven by the temporary prohibition on the use of statutory demands and certain winding up petitions, which currently remains in place until 30 September but could be extended further to March 2021.  Even when the prohibition is lifted, it is likely that backlogs within the courts will limit the number of winding up orders being made.

The sizeable drop in voluntary liquidations is unprecedented and somewhat counter-intuitive, given the financial distress being experienced by so many businesses and as evidenced by a number of high profile insolvencies recently.  However it appears to be driven in large part by the extensive financial support put in place by the Government in response to COVID-19, which includes business interruption loans (CBILs), bounce back loans (BBLs) and the Job Retention Scheme, as well as various grants and rates relief made available through local authorities.  Having been thrown a valuable lifeline, many companies have found themselves able to keep going where otherwise they would have ceased trading due to insolvency.

It is also evident that many companies would have been insolvent well before suffering any impact from COVID-19, but have nevertheless benefited from the Government’s financial support to avoid insolvency – at least for a short period.

Future Trends

For these reasons it is almost inevitable that the “missing” insolvencies from the April – June period, will take place at some point in the future, probably from Q4 onwards.  But on top of this, we would also expect to see additional cases based on companies who would have remained viable, were it not for COVID-19 and who, in spite of Government support, have been unable to survive a lengthy period of poor trading.

It is therefore reasonable to expect that company insolvencies will not only return to the volumes seen in 2019, but will increase far beyond these levels.

About the Author

Robin Tarling

Robin Tarling is Managing Director at Bridgewood and plays a leading role in advising clients in insolvency situations.

View Robin's Profile and Contact Information

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