Company insolvencies on the decline: Is this the calm before the storm?

Last quarter, government data revealed a fall in company insolvencies as compared to the same period in 2019. Given the dire financial impact Covid-19 has had, with many companies struggling to survive, on first look, the figures may seem surprising. However, they were to be expected.

The last thing the government wants to see right now is a spike in insolvencies, before we are back to anywhere near the new normal. Companies that would have likely folded despite the pandemic have likely been propped up by various government support schemes in response to the pandemic. Combined with the temporary restrictions on most winding up proceedings and the limited availability of access to the courts, this will have reduced what would otherwise have been a significant number of insolvencies over this period. Yet unfortunately, this may only be delaying the inevitable.

It’s very unlikely insolvency levels are expected to remain so low going into the next quarter. Government support will gradually be scaled down and the prohibition on winding up proceedings is currently due to last only until 30 September 2020. The courts will progressively re-open, with the High Court already largely allowing electronic filing and remote hearings – so creditor action will pick up. Creditors must be given the opportunity to pursue claims, as this is not a binary situation. For example, landlords may currently have restrictions on their ability to claim rent and forfeit leases, but they owe money too and may be at risk of collapse, as has been seen with retail shopping centres. Wanting to protect businesses in distress is understandable, but it will have a knock on effect for those on the other side of the equation.

As the year progresses, it’s likely we’ll see a rise in businesses in distress seeking advice on insolvency procedures such as winding up or administration. There will be companies that for all the support and protection they have had, they can see that the writing is on the wall and are ready to call it a day now. They have looked into the future and not seen one that justifies the continuation of the business.

For those looking after corporate clients, there’s going to be a lot ‘what if?’ questions asked, as would have been the case in 2008, when the banking crisis hit and the solvency of businesses was considered to be under threat. As things turned out then, there wasn’t a deluge of insolvencies; in my experience, I saw mostly claims, often against professionals, arising out of losses in the property and financial services sector in particular.

Yet, I think we are looking at a different and, I fear, bigger animal this time. Clearly there are those sectors identified, such as travel, tourism, culture, hospitality, high street retail and construction that could be under a lot of pressure. Other businesses, for example those focused more on online services and, for example, in the niche sector of cyber security, are perhaps better insulated.

Again, it’s not a binary analysis: some businesses in vulnerable sectors may have good cash reserves, managed costs and adapted well to the pressures of the pandemic. Others may be in less obviously vulnerable sectors, but may have been found out in terms of using old technology and methods or carrying insufficient cash reserves, which has hastened a demise that would otherwise have been years in the making.

The best course of action is to be forensic in your evaluation of a client’s current standing, looking at options based upon solid forecasting. We didn’t know what we were facing at the start of 2020, so it would be a brave person that made bold predictions of who stays and who goes whilst we remain in the throes of the pandemic.

Stuart Evans, head of commercial litigation and insolvency specialist, BLM

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