Storm in a tea cup

The latest UK monthly insolvency data shows that the number of registered company insolvencies in March 2021 was 1,042, which is 22% lower than the number registered in March 2020.

Traditionally, insolvencies rise when there is an economic downturn, as weaker demand for goods and services forces some companies out of business. However, amid the coronavirus pandemic there has been a decline in insolvencies despite the UK recording its sharpest economic contraction in modern times.

The lower number of company insolvencies since the onset of the coronavirus crisis can be attributed to government intervention to prevent long term economic damage resulting from the enforced lockdown and associated reduced levels of economic activity. Key policies that have given struggling businesses a lifeline amid the pandemic are temporary measures contained in the Corporate Insolvency and Governance Act 2020. These include a suspension of serving statutory demands and restrictions on winding-up petitions where unpaid debt is due to Covid-19, which is set to end on 30 June 2021. Furthermore, the Act also temporarily removes the threat of personal liability for wrongful trading from directors, also ending by July.

Companies have further benefitted from government financial support, provided to help businesses survive the crisis. The most used measure has been the Coronavirus Job Retention Scheme (“CJRS”) which has paid up to 80% of workers usual wages in the crisis. Since the start of the scheme, a cumulative total of 11.4 million jobs have been supported by the CJRS at various times. The furlough scheme is set to terminate at the end of September, which is likely to cause a rise in unemployment and also will remove a vital source of cash that many enterprises have come to rely on.

One difficulty businesses will face as the economy reopens and the government withdraws support and temporary protection from liquidation, is which of their creditors to pay first. Many companies which have been affected by lockdown are likely to now owe a combination of their landlord, suppliers, HMRC and their banks. While they have been forced to close, they have seen no revenues and have been protected from paying back the debt due. However, as the economy reopens and businesses see revenues return, they will have to prioritise which debts they repay. At the end of June, landlords will be able to demand repayment of more than a year’s worth of rent from struggling tenants, but unpaid suppliers and banks will also want a share of the pie. The pressure will not only be driven by the expiration of debt moratoria but also by an understandable desire to get to the front of the queue. This is because creditors will believe that if they are paid immediately, they might be paid in full but if they wait until other creditors are paid, there may not be much left. However, if all creditors act in this fashion businesses might be unable to keep up with all the repayments forcing them into insolvency. We expect this to moderately add to the rise in insolvencies in the second half of the year, though much depends on how lenient HMRC will be in calling in outstanding tax debt.

In Q1 2021, there were 2,540 insolvencies in the UK, a 19% fall compared to Q4 2020. A similarly low level of insolvencies is forecast for Q2 2021 – at 2,500 – as continued government support allows many struggling enterprises to remain in business. Breaking this down on a monthly basis shows a fairly even spread across the three months, with the most insolvencies forecast to occur in April by a small margin, being the month in Q2 2021 with the tightest coronavirus restrictions.

Two peaks in the number of insolvencies are expected in July and October 2021, caused by the end of the temporary measures contained in the Corporate Insolvency and Governance Act 2020 on 30 June, and the end of the CRJS on 30 September.

In July, we forecast 1,600 insolvencies, with the equivalent month in 2020 showing reported insolvencies of 1029, this equates to a forecast increase in insolvencies of 55% for July 2021.  Whilst the forecast for July is the highest monthly figure since January 2020, as businesses have to resume debt repayments it only represents a 2% increase on the actual reported monthly insolvencies for July 2019.

The much larger peak is anticipated to follow in October, with 2,330 insolvencies an increase of 154% and 43% for the equivalent month in 2020 and 2019 respectively. Some businesses which have been just about hanging on financially are likely to become insolvent as soon as the support measures are removed. However, insolvencies are expected to remain elevated in the months following.

High numbers of insolvencies are also forecast in November and December 2021, as the impacts of the end of government support measures feed through into financial positions of UK businesses. 2,190 and 1,920 insolvencies are forecast in November and December which is a 34% and 54% increase on the reported insolvencies in the same months in 2019.

In 2019, 21% of insolvencies in the UK were compulsory liquidations. However, since the pandemic started, only 8% have been compulsory liquidations. As government protection for businesses is removed and the economy reopens, it is likely that this category will drive a rise in insolvencies.

This rise in insolvencies towards the end of 2021 comes despite the planned easing of restrictions, which will allow an economic resurgence. Cork Gully forecasts annual GDP growth of 7.4% and 7.8%, respectively, in Q3 and Q4 2021. As the economy continues to recover, insolvencies are expected to fall, and are forecast to stand at 1,610 in March 2022, some 6% lower than in March 2019.

Looking beyond, to forecasts for insolvencies in late 2022 and 2023, the number of business failures is set to return to near pre-covid levels. The average number of insolvencies per month for the 12 months to March 2020 was 1,515 compared to 965 for the 12 months to March 2021. We are forecasting that the average numbers of insolvencies for the 12 months to March 2022 and 2023 will be 1535 and 1632 respectively, an increase of just over 1% and nearly 8% respectively compared to the 12 months to March 2020.

Considering which businesses will see the most insolvencies, those which have been most affected by lockdowns are also likely to have suffered the most financially: hospitality, arts & entertainment and retail will be the sectors most immediately affected. The furlough take-up rate at the end of February stood at over 50% in each of these sectors, highlighting their dependence on government support amid the pandemic. Regions of the UK with a higher concentration of these businesses are more likely to see a rise in insolvencies. Northern Ireland is the UK region in which these three sectors make up the highest share of the local economy, followed by the East Midlands. London has and will be hard hit owing to a larger number of businesses in the leisure and hospitality sector.

The slower rollout and subsequent delays to the reopening of the economy mean that we forecast slower eurozone GDP growth, with expectations of annual growth of 4.0% in 2021. This growth rate falls short of other major economies, with our forecasts predicting expansions of 7.1% and 7.0% for the UK and US, respectively, in 2021. Therefore, we would naturally expect the eurozone to have a higher number of insolvencies and higher percentage increase of insolvencies than the UK and US. The number of insolvencies across Europe fell by almost 20% between July and September last year, compared with before the pandemic. However, numbers are predicted to jump by over 30% across Europe this year as support measures are rolled back.