London leads the way for growth but risks abound
by Rory Traynor
Company insolvencies were down during the months around lockdown, despite the adverse effects Covid-19 had on many businesses. While this suggests government schemes to save companies worked, we will likely see a jump in dissolutions over the coming months.
The first hints of an increase in insolvencies came in the Companies House ‘Companies Register Activities: 2019 to 2020’ report. It revealed that the period from 2019 to 2020 saw the highest number of company dissolutions since 2009 to 2010, and that this number was influenced by figures in March 2020.
During this month – a time when the effects of Covid-19 were beginning to be felt, but before lockdown and schemes designed to help businesses were fully introduced – the number of business dissolutions “increased considerably” when compared to the same month in the previous year.
While this initial data suggested a potential avalanche of insolvencies, this has not been the case.
Data from The Gazette shows that post-lockdown, the number of insolvencies actually decreased. While pre-lockdown there were 66 company insolvencies daily, in the six working days following 23 March, this halved to just 29. The daily number of bankruptcies has increased in the months since, but figures are yet to reach pre-lockdown levels.
Why the Mixed Signs?
It would be nice to think that the low number of insolvencies is due to companies performing well despite the challenging environment. But this is not the case.
A far more likely explanation is that a combination of lockdown, which caused a reduction in activity at the organisations involved in insolvency processes, and government schemes rolled out over the past few months to protect businesses, has extended the life of companies that would have otherwise failed.
The following factors are all likely contributors to the slowdown in the number of businesses that are being written off the Companies House database:
- HM Courts & Tribunals Service has reduced the operation of the courts and tribunals that often play a part in insolvencies.
- HMRC has reduced enforcement activity.
- The Insolvency Service, insolvency practitioners, and Companies House have been adjusting to new working arrangements.
- There have been delays in documents being provided to Companies House by insolvency practitioners.
Government schemes designed to help businesses survive the pandemic are also greatly reducing the number of insolvencies. While these programmes will no doubt help some companies survive over the long term, others will struggle once the policies are lifted. Here are some of the measures that have staved off insolvencies:
- The furlough scheme has been a massive help for companies that would have otherwise been crippled by the cost of their wage bill.
- The Corporate Insolvency and Governance Act 2020 reduced the power of landlords by temporarily stopping them from repossessing properties when tenants fail to pay rent. It also prevented the use of winding up petitions unless the person seeking the petition could demonstrate that Covid-19 did not financially affect the company.
- Several government stimulus packages and loans have helped businesses stay liquid.
These Factors Have Created an Insolvency Lag
While company insolvency data post-March has been relatively positive, we are likely seeing a lag effect and Covid-19 will cause debt to double.
The winding down of the furlough scheme over the next few months will increase financial pressure as companies have to take responsibility for the cost of payroll. Meanwhile, from 30 September, people will be able to use winding-up petitions and statutory demands as normal.
Additionally, HMRC will start to pursue more aggressively those companies that haven’t paid their tax bills. This could be made worse due to its position as a secondary preferential creditor in insolvencies.
The above factors mean that over the coming months we will likely see the large number of liquidations that the pre-lockdown figures at the start of this report suggested were coming.
Companies Have to Stay Aware
Unfortunately, insolvencies often have a chain effect – a company becomes insolvent and being unable to pay its bills, affects businesses down the supply chain. Even those not feeling the impact of Covid-19 and lockdown may struggle if the organisations they work with are unable to pay bills or fulfil contracts.
It is, therefore, crucial that businesses have a good understanding of the financial health of companies they interact with so they can take action immediately if they notice a business is at risk of liquidation.
Red Flag Alert is a key tool to use for this critical analysis. The dataset includes detailed financial information on over 6.5 million UK companies. We also give every business an easy-to-read financial health rating that estimates the chance of them going out of business.
Discover how Red Flag Alert’s experienced team can help you mitigate risk and protect your business. Why not get a free trial today and see how Red Flag Alert can help your business?
