AdvisoryMatters

What differences can we see when comparing the Government’s Q2 insolvency figures to those of Q1, and to earlier times? And what kind of companies are most affected?

In our last quarterly update we commented on some of the trends in the Government’s release of insolvency statistics for Q1 2022:

1. Corporate insolvencies had spiked significantly. This was compared not only to the period of the pandemic (when insolvency numbers were very low because of government support) but also to levels in the two years before that.
2. Despite this spike, the mix of insolvency types pointed mainly towards smaller failures. This was because 87% of corporate insolvencies were CVLs (Creditors’ Voluntary Liquidations), which tend to be used for smaller businesses. Pre-pandemic, the figure was around 70%.
3. CVAs remained at very low levels. Could the restoration of preferential status to HMRC have made this process much less attractive to creditors?

The Q2 corporate insolvency figures broadly follow these emerging trends. They totalled 5,629 – an increase of 13% on the previous quarter and 81% higher than the same quarter last year. At that point insolvencies were artificially depressed by the Government’s financial interventions over Covid.

What’s more this figure is 36% higher than the quarterly run rate of insolvencies in the two years pre-pandemic. Overall, the Q2 number is the highest since Q3 2009, when the global economy was still severely impacted by the financial crisis of 2007-2008.

What size companies are most affected?

The Government’s statistics don’t include data on company size. But it is possible to make broad assumptions about the size of companies that are failing from the types of insolvency process they use. It tends to be the case that CVLs are used for smaller companies (usually but not always micro-companies and smaller SMEs). On the other hand administrations, which cost much more, tend to be used for larger SMEs (those with a few million pounds turnover or above) and corporates.

CVLs accounted for 87% of total insolvencies in Q2. The last time company insolvencies were this high, CVLs represented only 67% of the total and administrations made up 17%. In this most recent quarter, administrations made up less than 6% of the total.

So, whilst the statistics clearly show a large increase in company insolvencies, it’s possible they were skewed towards smaller businesses and that, for the time being at least, larger entities may be relatively insulated from the rising failure rate. In real terms, this means several hundred fewer larger businesses failing each quarter than we might otherwise expect given the overall rise.

A change in the rescue culture?

The third of the trends identified in Q1 also continued in Q2. CVAs accounted for only 0.6% of all company insolvencies in Q2 – only 32 CVAs were approved in the three-month period. This seems to show the declining popularity of this procedure. Taken together, the low figures for administrations and CVAs may also hint at the decline of the rescue culture, at least where formal insolvency procedures are concerned.

In the late 1990s and early 2000s there was a significant push from the Government and also the insolvency profession, to promote insolvency procedures as a means of rescuing businesses rather than simply closing them and disposing of their assets. The two principal platforms for business rescue over the last two decades were administrations –usually used as a means of selling a business as a going concern and debt-free to another corporate entity – and CVAs, where management retains control of a company and agrees a compromise with creditors. Typically this is for its debts to be settled over a period of time from future profits.

During the 2000s and early 2010s, these two procedures combined typically accounted for around 18% of all corporate insolvencies. This proportion had declined in the last few years so that in the two years before the pandemic they accounted for roughly 12% of all insolvencies.

But in the past four quarters these rescue procedures represented less than 6% of corporate insolvencies. Perhaps we will see an increase in this proportion over the next few quarters if the economic landscape is as challenging as many are forecasting. It could also be a sign that companies and their creditors are opting for more informal restructuring arrangements or debt compromises. So it may not be the rescue culture, but rather the role of the formal insolvency process in that culture, which is declining.

In our next newsletter we will keep you abreast of these trends and any others which we see developing when the next quarterly statistics are released.

If you would like more information about issues raised in this article, please contact Oliver Collinge.

<— Back to our AdvisoryMatters hub