Q1 insolvency figures merely the calm before the storm
The number of companies entering insolvency procedures in the first quarter (Q1) of 2020, according to figures released by the Insolvency Service, decreased when compared with the previous quarter (Q4 2019) and the same quarter last year (Q1 2019).
There were 3,883 total company insolvencies in Q1 2020. Insolvencies decreased by 8.5% from Q4 2019 and also decreased by 8.5% from the same quarter in the previous year.
Creditors’ voluntary liquidations (CVLs) were the most common type of company insolvency, accounting for over two-thirds (70%) of cases, followed by compulsory liquidations (18%).
Not unsurprisingly, the sectors most effected remain construction, retail and accommodation/food services. Whilst there have been some high-profile failures, most of these businesses were facing difficulty before the Covid-19 crisis. These latest figures give little indication however of what may be to follow with such a change in trading conditions resulting from the UK and worldwide lockdowns.
Graham Bushby, partner and national head of RSM’s restructuring practice, said: “These figures are not particularly surprising following on from the general election in December and generally positive trading conditions at the start of 2020, but these conditions feel like a world away.
“Circumstances have changed experientially since the back end of Q1. Initial wide-spread predictions were that we would see an early spike in administrations. Yet these haven’t materialised, or not nearly to the same extent as was forecast, largely due to the unprecedented government-led counter measures installed at the outset of the UK-wide lockdown, that have allowed organisations to continue operating.
“These extraordinary government measures are praiseworthy, but the reality is that they may just be kicking the can down the road. Deferring tax payments or taking out a CIBIL loan will help in the short term, but this is money that will still have to be paid back in due course. These measures may only act as an avoidance or delaying measure, unless other restructuring options are pursued.”
R3 Midlands chair Eddie Williams, a partner at Grant Thornton in Birmingham, added: “The surprising decline in levels of corporate insolvency in the first quarter of 2020 is partly reflective of the improving post-Election business climate, which was abruptly curtailed by the COVID-19 pandemic.
“The quarterly and year-on-year decreases in corporate insolvency numbers is highly unusual given the circumstances and climate, and such decreases are very unlikely to last. The impact of the coronavirus on every aspect of the business world is hard to overstate, and almost all companies, from multinationals to microbusinesses, have been affected.
“Given the role of the courts in some corporate insolvency processes, as the Insolvency Service notes, these latest statistics may well have been artificially suppressed, to a degree, due to the curtailment of normal working hours by the courts. We may well see a backlog of cases coming through in future releases.”
