Q1 2020 insolvency statistics – R3 response

30 April 2020

Duncan Swift, Past President of insolvency and restructuring trade body R3, responds to the publication of the Q1 2020 (January-March 2020) England & Wales insolvency statistics, which were published this morning by the Insolvency Service.

Corporate insolvencies

• Underlying corporate insolvencies fell by 8.5% in Q1 2020 compared to Q4 2019 and fell by 8.5% compared to Q1 2019.

“The surprising decline in levels of corporate insolvency in Q1 2020 is partly reflective of the improving post-Election business climate, which was abruptly curtailed by the COVID-19 pandemic.

“However, today’s quarterly and year-on-year decrease in corporate insolvency numbers is highly unusual given the circumstances and climate, and 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, the Q1 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.

“Businesses have been affected by the continued uncertainty around Brexit and the future of the UK’s trading relationship with the EU, with some seeing a decline in demand from customers in Europe, while others have held off investing in staff, plant or stock until the landscape looks clearer. One unexpected silver lining, however, is that many companies maximised their working capital facilities with their banks and lenders before the departure date of 31 January, in anticipation of any Brexit-related disturbances to business patterns. This will provide a cash cushion that will be helping many to keep their companies afloat in the wake of the pandemic, and its huge impact on cashflow.

“Companies have adapted to the current supply and demand crisis: from forecasting cashflow and putting outgoings under the microscope, to setting up new ways of working for staff members where possible, to talking with suppliers, creditors and funders to try and find compromises or agree payment holidays, there are many ways that business owners have demonstrated their creativity and crisis management skills.

“Government support on an unprecedented scale has been offered to companies and employees via the employee support scheme, state-backed business loans and grants, the suspension of business rates, a VAT holiday, the suspension of evictions from commercial properties for non-payment of rent, and so on. All of this is welcome, but it is clear that it will not have been enough to keep every company afloat, especially those which had entered the crisis period with existing debt problems.

“Many members of the insolvency and restructuring profession have changed their working practices as a result of the coronavirus, but despite that the profession stands ready to help, providing practical and immediate advice and support for directors facing circumstances unimaginable just a few short months ago. Seeking out a licenced and reputable insolvency and restructuring expert for their input and guidance on the best steps to take to protect a business may be the key to coming out the other side in a position to take advantage of any signs of economic recovery, so do not delay if your company has been impacted.” 

Personal insolvencies

• Personal insolvencies fell by 3.9% in Q1 2020 compared to Q4 2019, and fell by 11.2% compared to Q1 2019.

“A quarterly fall in personal insolvency numbers is surprising given the challenges consumers faced early on in 2020, and given the general upward trend in personal insolvencies since around 2015.

“However, the Insolvency Service has urged caution when looking at these statistics due to the disruption to normal insolvency processes caused by the coronavirus. It is notable that bankruptcies where the creditor has initiated the process – which requires a court hearing – have fallen to their lowest level in at least 10 years, but bankruptcies initiated by the person in debt – which can be processed entirely online, with no need for court involvement – are at their highest level since Q3 2014.

“Even before the coronavirus hit, causing widespread economic turmoil, many people were in a precarious or distressed financial situation. Earnings had long lagged behind inflation, while R3 research from January 2020, when COVID-19 was only just making its way into the news, found that a fifth (21%) of adults in Britain said they had no savings at all at the moment.

“Many people are just one change in circumstances away from being unable to keep on top of their debts. Illness, a relationship breakup, a reduction in hours at work or the threat of job loss can all be devastating even in more ‘normal’ times, but the impact of coronavirus has made this underlying reality more visible.

“The support from Government to underpin employment through the furlough scheme and to replace lost income for the self-employed has helped many people stay afloat. However, the schemes do not cover everybody, and 80% of usual income for some people on furlough may not be enough to cover their outgoings if they were already finding budgeting a stretch. Many companies also made redundancies before the furlough scheme was announced, and unemployment is predicted to rise as a result of the coronavirus.

“The current crisis is playing havoc with the ability of many to use their normal financial coping strategies. For example, people who look for marked-down food or cheaper brands in supermarkets may find these are unavailable, while advice to shop as infrequently as possible means they cannot rely on finding end-of-day bargains, if indeed they are able to leave their houses at all. The closure of schools means many parents and carers are having to find money for extra food for their children, although voucher schemes offered by some schools and nurseries offer a measure of relief.

“It is vital to emphasise that people who are finding it tough to cope at the moment do not need to do so alone. There are many sources of advice and support available, and reaching out for help as soon as possible can only be a positive move. Just make sure that anyone offering advice is qualified and trustworthy, as – sadly – scammers tend to thrive in difficult times such as these.”