Q2 2020 corporate and personal insolvency statistics – R3 response

30 July 2020

Colin Haig, President of R3, the insolvency and restructuring trade body, comments on the publication of the Q2 2020 corporate and personal insolvency statistics for England and Wales:

Corporate

• The overall number of company insolvencies decreased by 23% in Q2 2020 compared with Q1 2020 (from 3,848 in Q1 2020 to 2,974 in Q2 2020), and by 33% when compared with Q2 2019 (4,425).

"Today's drop in corporate insolvencies is driven by a fall in Compulsory Liquidations and Creditors' Voluntary Liquidations (CVLs) - influenced, we suspect, by the range of government support available to businesses, the issues around holding court hearings at the start of the pandemic, and the ban on winding-up petitions.

"Despite the fact we've had the lowest quarter for corporate insolvencies since 2010, now is not the time to be lulled into a false sense of security. We have not seen the full impact of COVID-19 on businesses because of the lifeline the Government's support has provided.

"What we do have an idea of, however, is the impact of the pandemic on the economy, and we know it has been disastrous. The unprecedented 20.4% contraction in GDP in April - a contraction which undid 18 years of economic growth - is evidence of this.

"In addition, consumer confidence has been unsurprisingly low, and with many likely to be worrying about their jobs and their financial futures, consumer spending has been reduced.

"This, coupled with the practical effects of lockdown, will hit a number of businesses hard - retail, restaurants and bars, especially - even if it hasn't already. It will be interesting to see what effect the measures the Chancellor announced earlier this month have had, and whether they give these industries the shot in the arm they need.   

"It's worth noting that the next set of quarterly statistics will cover the immediate period after Quarter Day in June and the date for when deferred HMRC debts are due. These two deadlines will have posed a challenge to businesses which have not been trading as they are not likely to have the cash at hand to cover this. They will also have faced additional staff costs and the additional costs incurred in getting their premises Covid safe.

"Our members are telling us that the insolvencies which took place at the start of lockdown were mainly those where the companies involved were already in some form of financial trouble. It may not be long before this changes, however, and companies which would be viable under normal circumstances begin to seek support from an insolvency and restructuring professional. 

"As more businesses start to reopen, directors should beware the risk of overtrading - taking on a large volume of new orders without the necessary working capital to support their operations and production. Those who do not keep a very close eye on whether they have the financial overhead to fulfil the rush of orders they receive could soon find themselves struggling to stay afloat. 

"Anyone who is worried about their business's financial health should seek advice from a qualified professional as soon as they start to see signs it's struggling, for the best chance of turning their situation - and their business - around."

Personal

• Total individual insolvencies in Q2 2020 increased by 12% (32,153) from Q1 2020 (28,747) and by 7% from Q2 2019 (30,076).
• IVAs were the most common type of individual insolvency (78% of cases), followed by DROs (15%) and bankruptcies (8%).

"Today's rise in individual insolvencies has been driven by a significant quarterly increase in Individual Voluntary Arrangement (IVA) numbers, which may be more of a reflection that more people are seeking help with their financial situation rather than an increase in overall consumer debt levels.

"The fall in numbers of bankruptcies and Debt Relief Orders might indicate there is a potentially uneven spread of financial distress. This is because those who earn less tend to opt for IVAs and DROs, while bankruptcies are typically used by those with more assets or higher incomes. This suggests - as we've seen elsewhere - that the impact at this stage, at least, might be uneven, and that the recovery may well be K-shaped. 

"It's important to note that while today's figures indicate how the pandemic is affecting some indebted people, the expected increase in individual insolvencies is yet to materialise fully. The Government's support measures have provided a number of people with a crucial safety net in the first three full months of lockdown. Without them, many would have struggled even more, and as they begin to wind down, a number of people are likely to find themselves facing financial difficulty.  

"Despite the Government's efforts, the COVID-19 pandemic and its impact on employment levels and the economy have made many people anxious about their finances. Consumer confidence has been low since April, and people are pessimistic about their financial future, as well as the current and future health of the economy. 

"Research we carried out in May showed that our members expect personal insolvency numbers to increase between October and December of this year and in the first three months of 2021. They tell us that while requests for personal insolvency support didn't change in the early stages of the pandemic, people are becoming more concerned about their financial future.

"The best thing anyone who is worried about their finances can do is to get advice from a qualified professional as soon as possible. The earlier they do, the sooner they can begin to resolve their financial issues, and the better chance they have of improving their situation."