The last good news for a while? Insolvency figures are down in first quarter of 2020
They will be quoted extensively, not just because they are the most recent but also because they are the first of a new year and a new decade so will form a concrete point to be measured against for the next few years.
Also because the story will be in such marked contrast to what is likely going to follow.
England and Wales saw a total of 3,883 corporate insolvencies (seasonally adjusted) which is a decrease on both the previous quarter and the same quarter in the previous year (Q1 2019) coincidentally both by 8.5%.
The overall trend for all company insolvencies continues to be driven by the large volume of Creditors Voluntary Liquidations (CVLs). They account for more than 70% of all insolvency cases followed by compulsory liquidations and post administration liquidations that made up 18%. The remaining 12% is made up of all the other types of insolvency including administrations and company voluntary arrangements.
CVL’s are down by 10% on the previous quarter and down 6% on the corresponding Q1 of 2019.
Apart from compulsory liquidations, every single other category of insolvency also decreased.
Administrations decreased 13% from Q4 2019 and 8% from Q1 2019; Company Voluntary Agreements (CVAs) are down 10% from the last quarter and 26% from Q1 2019.
Compulsory liquidations increased 1% compared to Q4 2019 but are down 15% overall since Q1 2019.
Interestingly there was only one recorded receivership in Q1 2020. This is because they are increasingly rare, in fact the last time there was more than one in a quarter was Q2 2017.
Further analysing the figures by sector shows that the construction industry was far and away the leader when it came to the number of insolvencies with over 3,000 in the previous year although this was a 5% decrease on the same figure compared to the 12 months ending Q4 2019.
There have been 150 construction insolvencies registered in Q1 2020.
Next highest was the wholesale and retail trade and repair of vehicle industrial grouping with 2,360 and Accomodation and food services following them with 2,317.
Insolvency rates down
As the number of companies suffering insolvency events reduces, so does the underlying rate.
In the 12 months ending Q1 2020, the company liquidation rate was 40.7 per 10,000 active companies in England and Wales. This is slightly down from 42.1 in the 12 months ending Q4 2019 and in the same quarter a year ago.
The corresponding rates for individual insolvency categories also decreased: 7.7 per 10,000 from 8.1 for compulsory liquidations, 31.9 per 10,000 for CVLs from 32.6.
Generally, changes in company liquidations rates are strongly linked to underlying economic conditions. As the economy grows, so liquidation rates decrease.
The highest recent peak was 264.7 per 10,000 companies in the 12 months ending March 1993 over a year after the end of the 1990s recession.
The next sustained increase coincided with the 2008/09 recession when 94.8 companies per 10,000 entered liquidation in the 12 months ending December 2009.
The number of liquidations was slightly higher in 1993 than in 2009 but the rate of liquidations was substantially higher in 1993. This was because the number of active companies more than doubled over this period so a smaller proportion of the total number entered liquidation in 2009.
There are over 4 million companies operating in the UK today which continues to grow although this growth has slowed in the past two years.
In Q1 2020, there were 169,822 new incorporations and 136,978 dissolutions.
The new incorporations were down 7.1% on Q1 2019 but they had an unusually high number during that period. Dissolutions were also down 3.8% on the same period.
The first signs of the COVID-19 pandemic affecting the wider economy can be detected in the March 2020 figures when the number of incorporations decreased by 5.7% while dissolutions increased by 23%.
What does all of this mean?
Duncan Swift, Past President of insolvency and restructuring trade body R3, said: “The surprising decline in levels of corporate insolvency in Q1 2020 is partly reflective of the improving post-Election business climate, which was abruptly curtailed by the COVID-19 pandemic.
“However, today’s quarterly and year-on-year decrease in corporate insolvency numbers is highly unusual given the circumstances and climate, and very unlikely to last. The impact of the coronavirus on every aspect of the business world is hard to overstate, and almost all companies, from multinationals to microbusinesses, have been affected.
“Given the role of the courts in some corporate insolvency processes, as the Insolvency Service notes, the Q1 statistics may well have been artificially suppressed, to a degree, due to the curtailment of normal working hours by the courts. We may well see a backlog of cases coming through in future releases.
“Government support on an unprecedented scale has been offered which is welcome, but it is clear that it will not have been enough to keep every company afloat, especially those which had entered the crisis period with existing debt problems.”
Chris Horner, Insolvency Director with Business Rescue Expert, said: “Whilst there have still been a number of high profile insolvencies, with the level of government support due to end at the end of Q2, we expect to see a significant increase in the number of insolvencies in Q3 of 2020.”
“Many companies, who would have otherwise already entered liquidation, are holding off due to the furlough scheme, effectively leaving the business in hibernation to allow the staff to continue to be paid whilst jobs are largely inaccessible.”
You don’t need to be an insolvency practitioner to believe that these figures will be the best we’ll get for some time.
If you’re worried about the future of your company then the best advice we can give you right now is to contact us today.
One of our expert team of advisors will set up a free and convenient initial consultation with you. You can tell us precisely where your concerns are and we can get to work with you to create an efficient and effective roadmap to navigate beyond them.