South and Thames Valley: R3 comment on annual insolvency figures

Garry Lee, chair of the R3 Southern and Thames Valley region, and an associate director in the recovery and restructuring services department at accountancy firm Smith & Williamson’s Southampton office, comments on the 2020 corporate and personal insolvency statistics for England and Wales:

Corporate insolvencies

• There were 12,557 underlying corporate insolvencies in 2020 – a fall of 27.1% from 2019’s figure of 17,224.
• Underlying corporate insolvency numbers increased by 16.9% between Q3 and Q4 2020.

“The annual reduction in corporate insolvency levels – to the lowest total figure for more than a decade – has been driven by a decrease in all types of company insolvency. The most significant factors behind it are the support measures the Government has introduced for businesses since the onset of the pandemic and the suspension of creditors’ ability to take action against many corporate debtors.

“Corporate insolvency levels increased by nearly 17% between Q3 and Q4 2020, and were driven by an increase in creditors’ voluntary liquidations. This may suggest that the effects of the pandemic are now pushing some firms into insolvency, but it’s worth noting this quarter’s figures are still significantly lower than they were this time last year.

“The Government’s covid support measures and legislation are key drivers of these low insolvency numbers, but they have deferred rather than deterred the full effects of the pandemic being reflected in corporate insolvency levels. It’s a question of when, not if, levels of corporate insolvency increase this year, but the timing will depend on when – and how – the Government support ends.

“2020 was a devastating year for British businesses. The pandemic and the series of lockdowns which were introduced in an attempt to slow down infection rates took a toll on the economy and made it harder for firms to operate. The retail, hospitality and tourism sectors have been particularly badly hit, and we have seen a number of household names enter an insolvency process or announce restructurings in an attempt to mitigate the effects of the pandemic.

“The next 12 months are likely to be challenging for businesses. Alongside the pandemic and the economic impact it has had, the change in our relationship with the EU is likely to affect a number of firms as new arrangements are put into effect – and there have already been a number of well-publicised teething problems.

“At the moment, with Government support still in place and creditors generally sympathetic to the challenges of the business climate, many companies may find they have a precious – albeit temporary – breathing space. Furthermore, the debts that have been deferred, including VAT and some rents, will now have to be paid together with the commencement of repayments in respect of the Government-backed loan schemes, leading to additional cash-flow pressures.

“Now is the time for their directors to think about how they move forward and take advice from a qualified source as soon as they see signs their firm is starting to struggle, or if they’re worried about the next year. As the saying goes, it’s always worth hoping for the best but planning for the worst, and doing so now will mean you have more options later on.”

Personal insolvencies

• There were 111,424 personal insolvencies in 2020 – a fall of 8.6% on 2019’s figure of 121,882.
• Personal insolvency numbers increased by 57.2% between Q3 and Q4 2020.

“The year-on-year decrease in personal insolvency levels is due to a fall in bankruptcy and debt relief order numbers. These processes tend to be a more accurate reference point for levels of serious individual indebtedness and were consistently lower following the arrival of the pandemic from Q2 onwards than they were during the same period in 2019.

“The partial closure of the courts and subsequent reduction in capacity have also helped to suppress bankruptcy numbers ever since the first lockdown in March.

“Despite the fact that personal insolvency numbers decreased in 2020 compared to the year before, this trend doesn’t show the full picture of how the pandemic has affected individuals. In fact, the increase in personal insolvencies between Q3 and Q4 of last year may indicate that the damage the pandemic has wrought on many people’s finances is finally starting to translate through to the official insolvency figures.

“The pandemic has hit people’s finances hard. While many have been able to save money and repay debts, there are millions more who have had to borrow to get through it, and who are increasingly vulnerable to financial problems caused by unexpected issues like missed benefit payments, unexpected bills, or redundancy.

“Government initiatives like the furlough scheme, coupled with payment holidays from banks and other lenders, have provided a critical safety net for many, but sadly these can’t last forever and haven’t been able to help everyone.

“Despite the scale of support that has been available, unemployment has already increased to a level not seen since 2016 as businesses attempt to navigate the commercial turbulence the pandemic has caused, and consumer confidence remains low as people worry about their financial position and the current and future health of the economy.

“There is some good news for people in debt on the horizon, with the breathing space scheme due to be introduced in May. This will offer people a chance to talk to a debt adviser about their options, free from creditor pressure.

“In the meantime, we cannot overstate how important it is for anyone with money worries to speak to a reputable and professional source as soon as they can, as debt problems only get worse as time goes on.

“The booklet launched by R3 earlier this month `Dealing with money worries – a guide to your options’ provides an overview of the potential solutions available to those who are worried about their personal finances.”