Corporate insolvency in England and Wales – the state of the market
A recent increase in insolvencies represents a catch-up effect from the pandemic but there is still much vulnerability in the economy, writes Fladgate’s Jeremy Whiteson
On 17 May, the UK Government Insolvency Service published statistics for corporate insolvencies in England and Wales for April 2022. During this period, 1,991 insolvencies were registered, more than double the number registered in the same month in the previous year (925) and 39% higher than the number registered pre-pandemic in April 2019.
These figures, read in isolation, may then give cause for concern. However, the details of the figures show a more nuanced situation.
An increase in corporate insolvencies between 2021 and 2022 was expected as the government’s temporary pandemic restrictions on the enforcement of creditor and landlord remedies expired. During the pandemic, temporary restrictions on creditors winding-up petitions, suspension of wrongful trading duties and commercial landlord remedies inevitably suppressed numbers of corporate insolvencies.
Much of the increase shown in recent statistics will, therefore, be a catch up effect – companies that have experienced difficulties for some time but which have been shielded by the temporary restrictions until their recent removal.
The biggest increase was in creditors’ voluntary liquidations (CVLs), which are, typically, used where a company has no ongoing business, and often when there are few remaining assets of value.
In April 2022 there were 1,777 CVLs, more than double the number in April 2021 and 74% higher than in April 2019. This may then reflect that many affected companies’ assets were exhausted by a long struggle through the pandemic leaving no business to rescue. In some cases, the companies entering CVL may have received bounce back loans or other government assistance that they are now unable to repay.
The numbers of administrations and company voluntary arrangements, which are typically used by troubled companies with trading businesses to rescue, remained lower than before the pandemic. There were 113 administrations, which is 51% higher than April 2021 but 22% lower than April 2019 and 10 CVAs, which is double the amount in April 2021 but 62% lower than April 2019. That may reflect that companies with ongoing businesses are managing to stay afloat, possibly through operational business success or an ability to continue to access business finance when needed.
Interestingly, the number of CVLs for April 2022 was lower than the preceding month (1,844 down to 1,777). That may give limited grounds for optimism. If the increase in numbers reflects a catch up from the pandemic period, then maybe, the numbers have fully caught up.
There are other possible factors pushing the figures down. While landlords and other creditors are entitled to exercise their usual legal remedies for new debts, tenants who fail to pay rent from periods when they were forced to close their business due to pandemic period restrictions may be able to use the new statutory arbitration scheme designed to help landlords and tenants reach a compromise on these arrears which both parties can cope with. This procedure may be delaying more aggressive landlord remedies, including starting insolvency actions.
It is probably also true that despite a recent more cautious approach to investment in pre-profit (and even more pre-revenue) technology companies, we remain in a relatively benevolent funding environment. It’s a truism that money must find a home, and if it is diverted from the tech businesses, some will flow, directly or via collective funds, into other operational businesses.
However, we should not be overly relaxed about the future. There are many vulnerabilities in the economy – the cost of fuel and food stuffs, staff shortages, wage increases, general inflation, increased post-Brexit export regulation and geopolitical uncertainty to name a few, which could easily push many companies into difficulties. Not only could these factors affect operating costs, they could also damage the sentiment of lenders and investors and their willingness to support the operational businesses.
There are also longer term structural shifts to navigate. High street retail and casual dining sectors were experiencing high levels of distress before the pandemic, with many household names going through high profile insolvency and restructuring procedures. Recent increases in staff and operational costs would seem to increase the vulnerability of these businesses.
That could then have a knock on effect on city centre retail landlords. City centre office landlords will also need to cope with changes in office usage, perhaps introducing more flexible space and better leisure facilities for staff.
Shifts in the pandemic period from gym to home exercise are likely to adversely affect expensive gym memberships and the increased scepticism in tech funding will hit those businesses that require repeated funding rounds to carry on.
Caution is recommended!
Jeremy Whiteson is a partner and head of insolvency and restructuring at UK law firm Fladgate