Waiting for the wave: When will insolvency cases come crashing in?

Brexit (remember that word?) and Covid-19 together with the cost-of-living crisis, the war in Ukraine and rising inflation may appear to be the perfect storm of events colliding together to create untold pressure for UK businesses. 

Insolvency and turnaround professionals have in previous times of economic uncertainty awaited increased volumes of formal insolvency cases which never materialised. What will the impact of these events be for insolvency cases? Time for a bit of crystal ball gazing backed up by some underlying insolvency statistics.  

The Covid support from the government in the form of loans and grants together with postponement of enforcement, such as winding up petitions, has undoubtedly led to a depression in the number of formal insolvency cases. This is borne out by the relevant statistics during the period of the pandemic, and the general theme of a watch and wait approach from directors of UK businesses who were prepared to seek advice from insolvency practitioners about options but there was no burning issue requiring a formal appointment.

Insolvency rates set to return to pre-pandemic levels 

Headlines are that there has been a material rise in creditor voluntary liquidations in the last month – up nearly 40% on the previous month. Administrations and compulsory liquidations are also up – administrations are almost back to pre-pandemic 2020 levels and compulsory liquidations are at their highest monthly level since July 2020.

What is driving the growth in these numbers? There is no doubt the colliding pressures mentioned above are causing an impact on the numbers. There’s also the issue of businesses that were essentially “hanging on” whilst the government support was available – which essentially allowed directors some time to make decisions which without the Covid support they would not have had. In addition to this, those businesses that were essentially broken and would have gone into insolvency had Covid not occurred and created a two-plus-year hiatus period. My confident prediction is that we will, in short order, see a return to pre-pandemic levels of insolvency cases.

What is more uncertain is what levels of insolvency may occur beyond that. Early on in the pandemic there was talk of a tsunami of insolvency cases. 

That early talk appears to have dissipated but not all of the colliding events mentioned above were in existence at that stage. So why is a tsunami no longer a distinct possibility? 

There’s a level of resilience amongst UK directors who have weathered a lot of issues and appear to be able to seek early advice and find creative solutions to their problems. This will help those businesses who are struggling. There is also a very good distressed investment market and liquidity for taking on new borrowing provided the relevant balance sheet can support it.

Balanced against this is the high level of businesses with bounce back loan borrowings and HMRC debt. If UK directors find that the going gets too tough then they may seek a creditor’s voluntary liquidation with a potential phoenix restart to alleviate the pressures.

There is no clarity in all of this other than to say that the need for relevant insolvency and turnaround advice remains strong. A prediction is that members of the profession will get busier. The question is how busy and when?  

In 2023 we will introduce a TRI Strategy Premium Membership, however all Premium content is currently free to view until then.