AdvisoryMatters

Oliver Collinge, Director in our Restructuring team, compares data from Q4 2022 to Q1 2023, and considers what might be next for UK businesses.

In our last article ‘UK insolvency statistics: a phantom wave’, we analysed the insolvency statistics for Q4 2022. At the time, while the headline insolvency figures were very high – the highest they have been since the peak of the Credit Crunch in 2009 – there provided little evidence of wider economic issues. 82% were Creditors Voluntary Liquidations (CVLs), whilst administrations – a much better proxy for medium to large company insolvencies – accounted for only 6% of all insolvencies (compared to a 30% share during the credit crunch). This was borne out by redundancy numbers in the UK which were at a 20+ year low in Q3 2023.

Broadly, it shows a continuation of these trends. Total company insolvencies remain very high, staying at basically the same level as the prior quarter (Q4 2022: 6,261 / Q12023: 6,237). But again, CVLs, which tend to be used for small companies, continue to account for the vast bulk of total failures – making up almost 82% of all insolvencies.

Administrations continue to be below pre-Covid levels: there were 346 administrations in Q1 2023, which is 6% down on the previous quarter but, perhaps more interestingly, about 15% below the average of the three years pre-Covid. This is well below the rate we would expect to see in a serious macro-economic downturn.

Compulsory liquidations (where a creditor forces a company into liquidation through court proceedings) were subject to a very restrictive regime for the first year and a half of the pandemic as the government used a variety of measures to provide breathing space for companies in financial distress. Since Q4 2021 when most of these restrictions were lifted, compulsory liquidations have gradually increased and are now at roughly 90% of their pre-pandemic run rate. There were 765 compulsory liquidations in Q1 2023 compared to an average of 862 per quarter between 2017 and 2020.

Finally the Company Voluntary Arrangement (CVA), whose possible terminal decline we reflected on in the Summer 2022 issue of AdvisoryMatters, is just about hanging in there. 38 CVAs were approved in Q1 2023 – the highest number in the last two years, but still only 45% of pre-Covid rates. The indications are that there is still a niche for CVAs, but it’s a narrow one.

What to make of this data in aggregate? Although CVLs remain high, we are firmly of the view that Administrations are the best insolvency indicator of the level of distress in the economy. There are currently materially fewer failures occurring in medium to large companies than was the case before the pandemic. Redundancies nationally also remain at very low levels: the last reported quarterly number from the ONS (Q4 2022) was lower than 90% of the quarters between 2000 and 2020.

British companies and the economy in general, are exhibiting much more resilience than many were predicting last year. It remains to be seen whether this trend can continue, given stubbornly high inflation rates and much increased borrowing costs for both consumers and businesses. Keep an eye out for our next quarterly update to find out.

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