Company insolvencies double as cash crunch starts to bite & landlord restrictions lifted
Insolvency figures released yesterday for February 2022* by the government’s Insolvency Service showed corporate insolvencies more than doubled compared to the same month last year (1515 in February 2022 and 685 in February 2021). They were 13% higher than the number registered two years previously (pre-pandemic; 1346 in February 2020).
In February 2022 there were 1,329 Creditors’ Voluntary Liquidations (CVLs), more than double the number in February 2021, and 40% higher than in February 2020. Numbers for other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic, although there were more than twice as many compulsory liquidations and almost double the number of administrations in February 2022 compared to February 2021.
Difficult months ahead as pressure on businesses grows
Leading restructuring and insolvency professional, Oliver Collinge from PKF GM said: “The large rise in corporate insolvency numbers is not surprising. Many distressed businesses have managed to keep afloat by making use of the high level of government support available. However, as businesses have now started to repay BBLS and CBILS loans as well as deferred HMRC liabilities, pressure on cash is growing and we may continue to see the overall number of business failures increase.
Higher inflation, volatility due to the ongoing conflict in Ukraine, staff shortages, increasing energy prices, supply chain challenges and the need to repay Covid incurred debt, are all likely to lead to increased numbers of insolvencies during 2022.
Landlord restrictions lifted this month
The restrictions on Landlords’ abilities to forfeit leases and take action to recover unpaid rent are partially lifted at the end of March, and this will create further difficulties for some businesses. When these protections are removed, tenants and landlords will be forced to have difficult conversations that in some cases could result in the closure of a business.
Oliver Collinge added: “Whilst the Covid loans, support packages and interventions staved off many business closures, their removal is now exposing businesses already under severe cash flow and working capital pressures. It’s critical businesses act early and seek advice if they are struggling now, or think cash flow may be squeezed in coming months. The earlier they act, the more options they’ll have to secure the long-term survival of the business.
“The biggest increase is in Creditors’ Voluntary Liquidations (CVLs), where directors have chosen to place their business into an insolvency process. In part this may be because creditors can now take enforcement action, forcing directors to take pre-emptive action. There is also significant anecdotal evidence that many of these liquidations involve small companies which had taken out Bounce Back Loans and are now unable to repay them.”
A message to company directors
Oliver Collinge added: “There are plenty of proactive things you can do now to build resilience into your business for the post-Covid economy; don’t leave it too late. Having a restructuring professional guide you through the process can be invaluable in getting the best outcome and will also help you understand and mitigate your risk as a director.”
“For those businesses that are struggling, now may be the time to begin negotiations with landlords and creditors to develop manageable repayment plans. Will revenues be high enough to support your cost base? Will cash flows be sufficient to deal with the additional debt burden (both formal and informal) that has accrued during Covid? Perhaps a CVA is something which should be considered or, where you may need to take the difficult decision to make redundancies to survive, consider applying for government funding to meet the short term cash impact of this.”
*February insolvencies:
Of the 1,515 registered company insolvencies in February 2022:
There were 1,329 CVLs, which is 125% (2.25 times) higher than in February 2021 and 40% higher than in February 2020;
74 were compulsory liquidations, which is 124% (2.25 times) higher than February 2021, but 68% lower than February 2020;
three were CVAs, which is 50% lower than February 2021 and 84% lower than February 2020;
There were 109 administrations, which is 95% higher than February 2021 but 26% lower than February 2020; and
There were no receivership appointments.
