Q1 insolvency figures – calm before the storm?
The number of companies entering insolvency procedures in the first quarter (Q1) of 2020, according to figures released by the Insolvency Service today, decreased when compared with the previous quarter (Q4 2019) and the same quarter last year (Q1 2019).
There were 3,883 total company insolvencies in Q1 2020. Insolvencies decreased by 8.5% from Q4 2019 and also decreased by 8.5% from the same quarter in the previous year.
Creditors’ voluntary liquidations (CVLs) were the most common type of company insolvency, accounting for over two-thirds (70%) of cases, followed by compulsory liquidations (18%).
Not unsurprisingly the sectors most effected remain construction, retail and accommodation/food services. Whilst there have been some high-profile failures, most of these businesses were facing difficulty before the Covid-19 crisis. These latest figures give little indication however of what may be to follow with such a change in trading conditions resulting from the UK and worldwide lockdowns.
Graham Bushby, partner and national head of RSM’s restructuring practice, comments: ‘These figures are not particularly surprising following on from the general election in December and generally positive trading conditions at the start of 2020, but these conditions feel like a world away.’
‘Circumstances have changed experientially since the back end of Q1. Initial wide-spread predictions were that we would see an early spike in administrations. Yet these haven’t materialised, or not nearly to the same extent as was forecast, largely due to the unprecedented government-led counter measures installed at the outset of the UK-wide lockdown, that have allowed organisations to continue operating.
‘These extraordinary government measures are praiseworthy, but the reality is that they may just be kicking the can down the road. Deferring tax payments or taking out a CIBIL loan will help in the short term, but this is money that will still have to be paid back in due course. These measures may only act as an avoidance or delaying measure, unless other restructuring options are pursued.
‘We predict that the economic downward curve will be steeper than in 2008, with a consequent double spike in insolvencies, as we exit the lockdown, and then again in say 6-12 months’ time, so Q4 and Q1. The 1990’s and 2008 recessions show us that insolvencies, whilst initially increasing, do not peak until around 12 months after the recession. However, predictions of numbers approaching a million insolvencies as reported in recent weeks, seems a major exaggeration given that over the course of the 2008-13 period, total corporate insolvencies were less than 114,000.
‘The major banks face an unenviable balance between lending responsibly, arguably conservatively, and protecting their own futures, versus facing criticism for a lack of support.
‘For those companies who may be on the cusp of survival, it is vital that they act now and really take swift and often drastic measures wherever possible and effectively go into survival mode. Even for those that are more secure, will need to plan for a very different trading environment as we exit the crisis. Many may still need some form of restructuring process on the way out of the recession, focusing not only on how to survive to trade another day, but how to prosper longer term.’
‘The Covid-19 crisis has caused economies across the globe to adopt self-distancing as the de-facto international global public health policy to mitigate the spread of the disease. Unfortunately, that policy requires putting national economies on hold to save lives. Unlike in 2008 when companies continued to trade, albeit with limited means, this time the taps have effectively been turned off, for most. Re-starting the economy is going to be difficult, with many businesses facing new challenges around how they practically operate and very different consumer demands and requirements.’ /Ends.