The puzzle of fewer insolvencies in a shrunk Covid-affected economy – what’s behind the figures?

Debenhams has been one of the casualties this year

The puzzle of fewer insolvencies in a shrunk Covid-affected economy – what’s behind the figures?

With some of the largest retailers and wholesalers, hospitality outfits, travel and holiday companies in financial melt-down it seems counter intuitive that corporate insolvencies have fallen.

“The Government’s aid to so many companies through the furlough scheme and grants has kept many a zombie firm afloat,” said ICSM’s Ian Carrotte, “the problem will come when the support ends. Then you could see a masse of company collapses. Anecdotally in ICSM we hear about companies simply hanging on but with the debt building up they are in real terms insolvent.”

He said for viable firms the golden rule is not to trade with zombie companies as there is little or no chance of getting paid. His advice is money with an order.

The insolvency trade body R3 reported that April’s figures showed corporate insolvencies fell by 7.2% to 925 compared to March’s figure of 997, and fell by 22.9% compared to April 2020’s figure  of 1,199 while personal insolvencies were also down.

Christina Fitzgerald of R3, said: "We now have a year’s worth of pandemic insolvency figures, and it’s clear the Government’s support measures have prevented a significant number of businesses from becoming casualties of the economic consequences of Covid-19. The big question is what will happen to insolvency numbers as we come out of the pandemic, but there are too many variables to say with much certainty about exactly what this will look like.”

Ian Carrotte said how the economy emerges from the end of Covid restrictions would determine the levels of insolvency but his hunch is there will be a spike soon after the end of furloughing.

R3’s Christina Fitzgerald agreed: “And company directors need to make the most of the time they have left before these support measures finish to plan for the future, and work out how they will manage without state support.”

Soon some of the props holding up companies who are struggling will go such as the temporary ban on winding-up petitions due to finish at the end of June, and the temporary halt to commercial evictions for non-payment of rent ended in March while furlough ends this September.

In terms of the insolvency procedures used, it breaks up into the following: 55% creditor voluntary liquidations, 33% administrations, 7% compulsory liquidations and 5% company voluntary arrangements.

The top reasons for the struggles of such companies were management failure, financial issues, market loss and knock-on effect from the failure of another company (within/not of its supply chain).

About ICSM Credit

ICSM Credit has more than four decades of experience as a credit intelligence group whose members gain inside information about firms in trouble allowing them to avoid bad debts and rogue traders. To join costs less than a tank of fuel - while at the moment there's a special free temporary membership offer during the Covid-19 crisis which gives access to free legal letters. ICSM also has an effective debt collecting service which has a global reach - ask for details from Paul.

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