Insolvencies will inevitably return to pre-pandemic levels

The latest insolvency statistics released by the government this month showed that the number of insolvencies in April (925) was 7% below March (992) and 23% below April 2020 (1,199) and 35% below April 2019 (1,429).

We expect this trend of low corporate insolvency numbers to continue into May and June while government support schemes remain available. However, the tide is likely to turn soon.

While it remains uncertain exactly when the number of insolvencies will increase, it is inevitable that they will return to at least pre-pandemic levels in the future.

Now that the lockdowns are easing and a number of businesses that have been closed for most of the last 12 months are allowed to reopen, we expect that more businesses will need to carefully consider what future funding they will require if sales do not quickly return to pre-pandemic levels. Insolvency levels will rise when that funding is no longer readily available through the government schemes and creditors are once again able to enforce their rights.

Consumer facing businesses in the retail, hospitality, entertainment and tourism sectors will find the exit from lockdown the most challenging as it remains uncertain how much consumer habits have changed over the last 12 months. Clearly online shopping sales and sales of home dining experiences have increased significantly during the lockdown periods and it is difficult to predict whether any of these habits will continue and what impact this will have on the hospitality and retail sectors, which makes forecasting for some businesses very difficult.

There are so many questions that can’t be answered right now, such as the impact on cities with the prevalence of home working and also when we will see overseas tourists return in substantial numbers to major cities, that no one can be sure what the next 12 months will look like.

Now that businesses have reopened, management teams therefore face the challenge of unpredictable sales but have to pay all the fixed overheads such as rent, utilities and full wages will need to be paidl once the furlough scheme ends in September unless it is extended. In addition businesses will need to start repaying any Covid related debt such as Covid loans, any arrears of rent and HMRC arrears. 

Businesses fail when they run out of cash, so management teams should be scenario planning now to try to understand what their options are and whether there is likely to be a funding need in the next 12-18 months. We work with a large number of lenders that are prepared to lend additional cash to businesses that face financial distress and there is also an array of restructuring tools available that can assist viable businesses to get some breathing space from creditors and also defer or reduce payments to creditors.

The temporary government restrictions preventing forfeiture by commercial landlords and restricting the use of statutory demands and winding-up petitions are due to come to an end on 30 June 2021 and unless these restrictions are extended again, we expect to see these enforcement options being used again by landlords and creditors.

Management teams should be considering which of their stakeholders could issue a statutory demand or winding-up petition once restrictions are lifted and to ensure that they have the cash available or a plan in place to meet any demand. If a business has a commercial landlord and there are currently arrears, a formal agreement needs to be in place with the landlord regarding the arrears prior to the lifting of the government restrictions otherwise landlords could, after 30 June 2021, seek any of the remedies contained in many leases such as peaceable re-entry or forfeiture.

Matt Richards is Restructuring and Insolvency Partner at Azets.

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