How Has the Coronavirus Pandemic Affected Business Closure Rates?

After more than nine months of living with the coronavirus, it’s hardly surprising that businesses across a broad range of sectors are struggling. In recent weeks, the collapse of the Arcadia Group and Debenhams has highlighted the impact the pandemic is continuing to have on the high street, but what effect has the outbreak had on business closure rates as a whole?

A dramatic impact on GDP

The UK stands out among countries in Northern Europe as having the highest rate of GDP contraction. Initially opting for a ‘herd immunity’ approach allowed the virus to spread, forcing a subsequent lockdown that had a dramatic effect on GDP, with a 20.4% fall in Quarter 2 of 2020 when compared with the same period last year. 

Further complicating the situation in the UK has been ongoing Brexit uncertainty, which has already given the economy a serious knock. The impact of this uncertainty continues to this day, with it still unclear whether the EU and the UK will be able to agree to a future trade relationship. 

A surprising decrease in insolvencies

Given the technical recession the country has fallen into and the unprecedented headwinds UK businesses have been battling against over the last few months, you might expect corporate insolvency rates to be up. However, the official statistics (pdf) from the Insolvency Service show that business insolvencies for the first half of 2020 are down when compared to the same period last year.

In Quarter 2, which covers April to June, company insolvencies fell by 23% when compared to the previous quarter, despite the presence of a national lockdown for more than half of that time. Insolvencies also fell by 33% when compared to the same period last year. The three industries that experienced the highest rate of insolvency during that time were construction, vehicle repair and hotels and restaurants. 

Further monthly data from the Insolvency Service shows that the trend of decreasing company insolvencies has continued into the summer. The monthly figures for August 2020, show that insolvencies were lower than in the same period in 2019, with a 39% reduction in creditors’ voluntary liquidations (CVLs), a 39% decline in administrations, a 50% fall in company voluntary arrangements (CVA), and 67% fewer compulsory liquidations. So what is the reason for these unexpected insolvency statistics?

Why have insolvencies fallen?

Firstly, the government made changes to the insolvency regime in an attempt to protect companies that were experiencing financial difficulties. That included a suspension of the wrongful trading laws in the UK. That allowed the directors of businesses that were struggling financially to continue trading without any fear of prosecution. However, the suspension of those rules has now ended, which could lead to an increase in corporate insolvencies as a result.

The rules around compulsory liquidation have also been temporarily changed under the Corporate Insolvency and Governance Act 2020. The law has been changed to allow the court to refuse a winding up petition if the company can show that the outbreak affected its ability to pay its debts. That is likely to be a significant factor in the falling rate of compulsory liquidations.     

Another reason for the suppressed rate of insolvencies is the range of government support that has been available during the pandemic. The Bounce Back Loan Scheme, the Coronavirus Business Interruption Loan Scheme and tax payment deferrals have all helped to keep businesses afloat. The result is that many businesses that may otherwise have become insolvent during that time have been given an extra lease of life.

A rise in corporate insolvencies expected in 2021

It is thought that the government support and insolvency rule changes may have simply delayed insolvency for many companies, with some now living on borrowed time. As the support is phased out, we expect to see the corporate insolvency rate rise as those companies that were already struggling before the pandemic start to fail. 

As Tony Smith, the director of Company Debt, explains: “So far, the financial impact of the pandemic on UK businesses has been largely mitigated by the government initiatives and changes to the Corporate Insolvency and Governance Act 2020. As those are withdrawn, we certainly expect to see insolvency figures start to rise. However, what remains unknown is whether we can expect to see the insolvency tsunami that some have predicted. That will become clear over the next few months”.