With the 1st quarter statistics announced for 2022, we're interested to see how the insolvency figures have changed since the end of 2021 and since this time the previous year. We'll explore the various factors that can influence national Insolvency rates. We'll also reflect upon what these latest stats could mean for the nation's financial forecast and the future of the insolvency industry two years on from the start of the covid-19 pandemic.
What the Stats Say
Numbers don't lie and in our world of PR spin and fake news, we're happy to rely on our own analysis of the statistics at hand and leave the speculation to others. So here are the simple truths of quarter 1, 2022 and the numbers of individual and corporate insolvencies in the UK.
According to R3, there were 4,896 underlying corporate insolvencies and 32,305 personal insolvencies reported in the first 3 months of 2022. For those employed in the insolvency and restructuring sectors, these figures might mean something to you all on their own, but some may benefit from a little context around them.
Let's start with the world of business. we've said that 4,896 is the number of corporations becoming insolvent in quarter 1, but how does that compare to other quarters? R3 suggests that this number is "an increase of 6.1% from Q4 2021’s figure of 4,615, but a rise of 112% on Q1 2021’s figure (2,309)". While that is a slight rise from the end of the previous year, it is a staggering increase from the same time last year. Implying that the last whole year has presented a huge rise in the rates of businesses going under and struggling to pay their debts.
While this might not be the focus of many insolvency practitioners, we still think it's good to keep up to date on how the individual insolvency rate is tracking as an indicator of how hard things are for people, not just conglomerate organisations. People make up all businesses after all. So, what is the picture like for individual insolvencies?
R3 reports that "there were 32,305 personal insolvencies in Q1 2022 – an increase of 16.8% from Q4 2021’s figure of 27,668, and an increase of 14.2% on Q1 2021’s figure of 28,298." From these statistics, we can see that the financial difficulty experienced by many companies has not bypassed individuals, but also that recent events and shifts in economic activity have primarily impacted companies and organisations more than individuals, as we see in the number of individual insolvencies.
Since the beginning of last year so many businesses have been forced to close their doors for good or sell up and admit defeat, but why now?
Why Are There More Insolvencies Now?
After the initial shock of the coronavirus pandemic disrupted the financial market and pushed a wave of companies off the hypothetical cliff, we now have all sectors back open, more or less at full operation again, so why are so many corporations going under suddenly? Well, there are a couple of factors that seem to us to be major influencers in the financial difficulty many individuals and organisations are facing right now and resulting in an increased demand for those providing an insolvency service.
-Post Pandemic Pressure
Christina Fitzgerald for R3 says “this [Q1 2022] has been the busiest quarter for corporate insolvencies since 2012 as firms who have struggled with the economic consequences of the pandemic are now having to deal with the sharp rise in inflation"
Yes, many businesses were put under extreme strain in 2020 and 2021 during the various levels of lockdowns and restrictions and sadly many never saw the light of day again. The hospitality and leisure industries were especially put upon and while these limitations on their trading are no longer in effect and haven't been for some time, companies are clearly finding the post-pandemic economy an inhospitable place to be.
In terms of economic activity, the expected spending boom after the peak of the Covid-19 pandemic had passed never did seem to actually happen. Or if it did, the profits were immediately re-absorbed into the huge hike in inflation and the cost of living. There's no denying that it's expensive just to be alive right now, let alone trying to run a profitable business. Christina Fitzgerald for R3 claims "the spending boom that never came post-pandemic was the only thing many businesses were holding out for. Now that people are having to pinch pennies like never before, they can't afford to fill up the deficit with their expendable income. Perhaps this is partly behind the increase in insolvency rates."
-Cost of Living Crisis
The cost of living crisis is certainly a hot topic right now as the price of things like oil and other fuel has skyrocketed. This doesn't just affect those who directly use the fuel though. It means that everything that travels by road or sea is now more expensive to move, and therefore to buy. In terms of utilities, you'll surely have noticed from your latest electric bill that the cost of cleaner energy is not much better, and so transporting goods is now disproportionately expensive compared to the expected inflation.
Disposable income is now a distant memory for individuals and corporations alike. The cost of living crisis affects businesses just as harshly, if not more so than individuals because they then have to decide whether to pass their expenses onto the consumer (who are also struggling) or to sink themselves and cease providing employment for their employees. Credit Connect finds that "rising costs are the biggest challenge facing almost half of UK businesses in the next six months" and those costs are bound to be passed on to individuals to prevent the economy from collapsing completely. Those individual consumers aren't happy because everything seems suddenly expensive and so are forced to buy less. So it continues. The cost of business crisis is just as real as the cost of living crisis and it affects everyone.
A BDO survey of "500 leaders of medium-sized businesses reveals a third will increase the price of their goods and services in response to rising costs." Credit Connect also suggests that "as a direct result of rising inflation almost a third (31%) are seeking additional finance, rising to two-fifths (42%) of hospitality and leisure businesses and 36% for retail and wholesale".
You might notice that these are industries which were heavily impacted by the pandemic. Now the remaining companies that managed to weather the financial storm of the pandemic are forced to turn to loans or other credit-based avenues to keep afloat. Of course, you can guess where we're going with this. Taking on additional business loans without having any real expectation that the inflation rates will lower again, or that their sales will increase exponentially, means one thing - more businesses becoming insolvent and going into administration or liquidation.
What Does This Mean for the Future?
Well, for the future of insolvency it means we'll continue to be extremely busy but this is usually not great news for the financial forecast as a whole. The sad fact is that when insolvency practitioners are run off their feet and raking in the metaphorical chips, it means people are losing across the table.
All business is a game of chance and has its risks and insolvency professionals are far from unsympathetic toward those who are losing everything they've worked hard for. There's no denying that these are difficult economic times and that every income is having to stretch farther than feels comfortable. Sadly those who had little to play with, to begin with, are also badly affected and unless control is taken of the energy crisis and the runaway train that is commodity inflation then it's not set to improve.
While these figures aren't exactly encouraging for the general economy, if you work in insolvency but have no cases on your desk right now, you're in luck. It seems you soon will.
Being in Insolvency is a strange profession. You're there to help when you take a case, yet no one seems exactly pleased to see you. Your very presence means they failed, or that's often how it's perceived by those who've been captaining that sinking ship.
Then again, where would the economy be if you didn't do your job and provide your insolvency service? Those who are owed money would turn to the courts (even more than they do now) and incur further costs in doing so only to continue to receive no recompense. Managers of failing businesses could continue to sink deeper into the sand and without a helping hand to show them the cold hard facts they won't be able to see a way out for themselves or their business. Being overwhelmed by debt is bad enough without having other people's livelihood, income, and futures on your shoulders too.
Insolvency services truly do provide a vital service, and never more so than now, as the financial markets continue to appear to fall apart. Then again, it's often said that things have to get worse before they get better. We're all hoping that it's so with our national economy.
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What Is the Difference Between Insolvency and Liquidation?
Insolvency is a state of being - to be insolvent/to become insolvent. It means that your company cannot pay their debts. This is also true of those experiencing liquidation, but the term liquidation refers to the legal ending of a limited company. Once all their assets have been liquidated (returned to currency) the company can be officially terminated and will no longer be able to incur further debt.
Essentially, a company can be declared insolvent because it is unable to pay its debts but this may not always result in liquidation. There are instances in which a company can recover from insolvency with the right help from an insolvency service.
What Are Corporate Insolvencies?
The term "corporate insolvency" refers to companies, businesses, and other organisations whose value of assets is not sufficient to cover their accumulated debt (balance sheet insolvency), or a company that does not have enough disposable income at the time their debts are due (cash insolvency).
When a business cannot pay its creditors, it can become insolvent. This is the point at which an insolvency practitioner will organise their assets, debts, and financial obligations to fairly distribute what is owed. The qualified insolvency practitioner will either sell off some of the assets, restructure the business, or begin the process of liquidation in which all company assets are sold.
The alternative to corporate insolvency is individual insolvency.
What Are Individual Insolvencies?
Also referred to as personal insolvency, individual insolvency refers to the state of a single person who cannot afford to pay their debts and is subsequently made insolvent. Personal insolvency is more of a term of general understanding than a strict legal term, but it refers to an individual who owes more than £5000 to a creditor, and either -
- Has been served with a financial court judgement against them personally (not their business) which has been executed or an attempt has been made to execute the judgement.
- Has not paid a statutory demand within three weeks of receiving it, or resolved it in another way such as applying to the courts to have it set aside.