‘Perfect storm’ as UK corporate insolvencies surge

The Insolvency Service Agency reported that in March 2023 that corporate insolvencies had risen by 37% over the previous month, reaching 2,457 insolvencies England and Wales alone. This was the highest number of insolvencies recorded since monthly records began three years ago.

A perfect storm of factors has combined to produce this dramatic rise in insolvencies. These include a toxic combination of the fallout from Brexit, the coronavirus pandemic, runaway inflation and the mismanagement of the pandemic Bounce Back Loans. The net result is that we now in a truly treacherous environment for businesses.

Thanks to rampant inflation and higher interest rates, consumer confidence has sunk to worryingly low levels. With UK inflation recently hitting 10.4%, many consumers only wish to part with money for essential items, which has led to reduced cashflow for many businesses, and has even led to insolvency for some. Many companies also now have to start repaying the government backed loans taken out during the coronavirus pandemic, which adds further financial pressure at an already difficult time.

The government had also implemented measures to protect struggling businesses from their creditors during the coronavirus pandemic. Commercial tenants were similarly protected until recently. With those restrictions now removed, creditors and landlords are presenting winding up petitions against companies, which is rapidly driving up compulsory liquidations.

Although the Insolvency Service proudly proclaims that the number of director disqualifications is rising, it forgets to consider the demise of entrepreneurial spirit which underpins corporate growth. Without the entrepreneurial impetus for which the UK is famous, economic growth and innovation stalls. When corporate compliance becomes riskier, individuals may begin avoiding corporate structures altogether, instead acting as sole traders. Yet this carries far greater risk to their homes, personal assets and families, in the event of personal insolvency.

One piece of positive news is that personal insolvencies have so far fallen for the first quarter of 2023, when compared to the previous quarter. This could be due to the introduction of the government’s Debt Respite Scheme, known as the Breathing Space Scheme. This scheme gives people a grace period to take steps to resolve their debt situation, and has two variations. The standard scheme is available to any person with a problem debt, and it provides legal protections from creditor action for up to 60 days.

The other variation is known as the mental health crisis breathing space scheme and is reserved for individuals certified as receiving mental health crisis treatment. In this case, protections from creditor action last as long as the crisis treatment, plus 30 days - no matter how long the crisis treatment lasts. The Insolvency Service Agency figures released in March 2023 show that 672 bankruptcies were registered that month, which was 2% higher than in March 2022, but less than half of pre-2020 levels. These breathing space schemes appear to be playing a role in reducing the number of individuals entering into bankruptcy.

Companies, of course, cannot avail of such protections. Yet as more companies become insolvent, unemployment also looks set to increase. While the UK’s unemployment rate has remained relatively steady so far, one troubling sign is that the number of positions vacant recently decreased by 51,000 to 1.2 million. Yet even those in employment are becoming palpably poorer. Recent ONS figures suggest that, once inflation is factored in, UK workers’ effective pay rates fell by 3.5% annually, with total pay including bonuses down by 4.4%.

In a worst case scenario, this risks precipitating a downward economic spiral, with consumers’ inability to spend, causing businesses to become insolvent, and to lay off workers, which reducing consumer spending and economic activity in a downward spiral. However, economic downturns do inevitably come to an end. The key thing for now is to take steps to ensure that as many businesses as possible survive the current period of economic stagnation and uncertainty.

To achieve this, institutions such as the Insolvency Service and HMRC and the banks should take robust supportive action to help keep viable businesses afloat during these challenging times. They should be challenged to reflect on the difficulties directors of companies face in the current climate, and help them steer their ships through the current storm. Above all, they should avoid taking unnecessary actions which only serve to bring their ships under. Creditors and regulators alike should realise that it is ultimately in everyone’s best interest to work collaboratively with businesses to help as many as possible reach calmer waters.

Steve Thomas is a partner and insolvency mediator and corporate recovery specialist at Excello Law

www.excellolaw.co.uk