The Analysis Editor’s Letter


An insolvency wave to come?


Stephen Kiely Editor, CCRMagazine stephen@ccrmagazine.co.uk


A drop in insolvencies, last month, may only be as a result of temporary government action, according to a senior analyst. The overall number of company insolvencies


decreased by 23% in Q2 2020 compared with Q1 2020 (from 3,848 in Q1 2020 to 2,974 in Q2 2020), and by 33% when compared with Q2 2019 (4,425). Conversely, total individual insolvencies in


Q2 2020 increased by 12% (32,153) from Q1 2020 (28,747) and by 7% from Q2 2019 (30,076). IVAs were the most common type of


individual insolvency (78% of cases), followed by DROs (15%) and bankruptcies (8%). Colin Haig, president of R3, said: “The


drop in corporate insolvencies is driven by a fall


in Compulsory Liquidations and


Creditors’ Voluntary Liquidations (CVLs) – influenced, we suspect, by the range of government support available to businesses, the issues around holding court hearings at the start of the pandemic, and the ban on winding-up petitions. “Despite the fact we have had the lowest


quarter for corporate insolvencies since 2010, now is not the time to be lulled into a false sense of security. We have not seen the full impact of COVID-19 on businesses because of the lifeline the Government’s support has provided. “What we do have an idea of, however, is the impact of the


pandemic on the economy, and we know it has been disastrous. The unprecedented 20.4% contraction in GDP in April – a contraction which undid 18 years of economic growth – is evidence of this. “In addition, consumer confidence has been unsurprisingly low,


and with many likely to be worrying about their jobs and their financial futures, consumer spending has been reduced. “This, coupled with the practical effects of lockdown, will hit a


number of businesses hard – retail, restaurants and bars, especially – even if it has not already. It will be interesting to see what effect the measures the chancellor announced earlier this month have had, and whether they give these industries the shot in the arm they need. “It is worth noting that the next set of quarterly statistics will cover


the immediate period after Quarter Day in June and the date for when deferred HMRC debts are due. These two deadlines will have posed a challenge to businesses which have not been trading as they


August 2020


In addition, consumer confidence has been unsurprisingly low, and with many likely to be worrying about their jobs and their financial futures, consumer spending has been reduced


are not likely to have the cash at hand to cover this. They will also have faced additional staff costs and the additional costs incurred in getting their premises Covid safe. “Our members are telling us that the


insolvencies which took place at the start of lockdown were mainly those where the firms involved were already in some form of financial trouble. It may not be long before this changes, however, and companies which would be viable under normal circumstances begin to seek support from an insolvency and restructuring professional. “As more firms start to reopen, directors


should beware the risk of overtrading – taking on a large volume of new orders without the necessary working capital to support their operations and production. Those who do not keep a very close eye on whether they have the financial overhead to fulfil the rush of orders they receive could soon find themselves struggling to stay afloat. “Anyone who is worried about their


business’s financial health should seek advice from a qualified professional as soon as they start to see signs it is struggling, for the best chance of turning their situation – and their business – around.” On personal insolvencies, he added: “The fall in numbers of bankruptcies and Debt


Relief Orders might indicate there is a potentially uneven spread of financial distress. This is because those who earn less tend to opt for IVAs and DROs, while bankruptcies are typically used by those with more assets or higher incomes. This suggests – as we have seen elsewhere – that the impact at this stage, at least, might be uneven, and that the recovery may well be K-shaped. “It is important to note that while today’s figures indicate how the


pandemic is affecting some indebted people, the expected increase in individual insolvencies is yet to materialise fully. The government’s support measures have provided a number of people with a crucial safety net in the first three full months of lockdown. Without them, many would have struggled even more, and as they begin to wind down, a number of people are likely to find themselves facing finan- cial difficulty.” So it seems clear that there are times of change ahead.and we will


all need to be ready to react.. Enjoy the magazine!


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