Covid-19: Insolvency in the business world

27th September 2021

The Covid-19 pandemic has been nothing short of a global emergency, which has resulted in wide-ranging economic impacts on many businesses and sectors. As the Government introduces measures to support small businesses and commercial tenants, a sharp increase in insolvencies over the coming months is highly likely as businesses struggle to deal with the long-lasting effects of the pandemic.

Whilst this current economic crisis that the UK is facing is a unique situation, there are many similarities of crises we have seen before – decline in business activity, increased unemployment, and rising government debt levels. Historically, similar occurrences have shown that a sharp increase in corporate and personal insolvencies are a natural consequence of such economic events. The next six to twelve months will be a challenging time for many businesses and sectors coping with the combined effects of the pandemic, as well as the country easing itself out of restrictions.

According to leading think tank, The Institute for Government, the pandemic will have cost the public finances £394bn in 2020-2021. We also have seen a sharp increase in the rate of unemployment. 4% of economically active people aged over 16 were unemployed pre-pandemic, and this quickly rose to 5.1% at the height of the pandemic. These factors alone take a long time for an economy to recuperate from, so it is very clear that the impact of Covid-19 will be felt for a while to come.

Government support packages such as furlough, the CBILs loans and the temporary suspension on winding up petitions meant that Corporate Insolvencies for February and March 2021 totalled 685 and 992 respectively. These figures were 20% lower than the same period in 2020 and 37% lower than the same in 2019.

However, in July 2021 there were 1,904 registered company insolvencies – 13% higher than the number registered in July 2020 yet 24% lower than the number registered pre-pandemic in July 2019. This shows that since the start of the first UK lockdown in March 2020, the overall numbers of company and individual insolvencies have remained low when compared to pre-pandemic levels.

The Insolvency Measures introduced by the Corporate Insolvency and Governance Act 2020, which have from time to time been extended, have offered a buffer to many businesses which has enabled them to survive the pandemic thus far. However, it was inevitable that these measures could not continue indefinitely, and following the announcement from the Government on 10 September 2021, the Insolvency Measures will begin to be phased out from 1 October 2021.

This means Government backed loans will soon begin to become repayable, and the various suspensions on enforcement processes will come to an end. Included in this are forfeiture and possession proceedings by landlords, the use of statutory demands and winding-up petitions. We will also see an impact on the enforceability of ipso facto clauses in certain circumstances being curtailed.

Whilst insolvency numbers seem stable in relation to pre-pandemic figures, the changes that are about to come into force are sure to strain already pressurised industries, and lead to the predicted spike in distressed companies.

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