Government insolvency data shows a 50 per cent decline in company insolvencies. BLM Partner Stuart Evans responds
Stuart Evans Head of Commercial Litigation and Insolvency Law specialist at BLM responds to government insolvency data showing a 50% decline in company insolvencies in June 2020 when compared to June 2019.
Last quarter saw a fall in insolvencies: Was this to be expected?
Yes, the last thing the government wants to see right now is a spike in insolvencies, before we are back to anywhere near the new normal. The assistance given by the government through the various support schemes in response to the pandemic , combined with the temporary restrictions on most winding up proceedings and the limited availability of access to the courts will have reduced what would otherwise have been a significant number of insolvencies over this period.
Are insolvency levels expected to remain so low?
I would doubt it. Government support will gradually be scaled down and the prohibition on winding up proceedings is currently due to last only until 30 September 2020. The courts will progressively re-open, with the High Court already largely allowing electronic filing and remote hearings - so creditor action will pick up. Creditors must be given the opportunity to pursue claims, as this is not a binary situation. For example, landlords may have restrictions on their ability to claim rent and forfeit leases, but they owe money too and may be at risk of collapse, as has been seen with retail shopping centres. Wanting to protect businesses in distress is understandable, but it will have a knock on effect for those on the other side of the equation.
What types of insolvency work is on the rise and why? And which sectors are now most at risk of insolvency?
I am seeing two types of activity:
- The first is the business that for all the support and protection it has had, can see that the writing is on the wall and is ready to call it a day now. It has looked into the future and not seen one that justifies the continuation of the business.
- The second is from those in the business sector, looking after corporate clients and asking the “what if?” questions, as they did in 2008, when the banking crisis hit and the solvency of businesses was considered to be under threat. As things turned out then, there wasn’t a deluge of insolvencies; I saw mostly claims, often against professionals, arising out of losses in the property and financial services sector in particular.
I think we are looking at a different and, I fear, bigger animal this time. Clearly there are those sectors identified, such as travel, tourism, culture, hospitality, High Street retail and construction that could be under a lot of pressure. Other businesses, for example those focused more on online services and, for example, in the niche sector of cyber-security, are better insulated. But again it’s not a binary analysis, some businesses in vulnerable sectors may have good cash reserves, managed costs and adapted well to the pressures of the pandemic. Others may be in less obviously vulnerable sectors, but may have been found out in terms of using old technology and methods or carrying insufficient cash reserves, which has hastened a demise that would otherwise have been years in the making. We didn’t know what we were facing at the start of 2020, so it would be a brave person that made bold predictions of who stays and who goes whilst we remain in the throes of the pandemic.
Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.