3 Key lessons we can draw from the official insolvency statistics for year end 2021

Perhaps it comes from the fact that I have been out of the daily circulation of insolvency commentators for a few months and so I am coming at things with fresher eyes, but it seems to me that some may be missing the point in terms of the Official Insolvency Statistics to December 2021 published this week.

Insolvency Statistics for year end 2021 : 3 questions answered

In this blog, I highlight – and try my best to answer – the 3 questions which leapt out at me from reviewing the stats. I also try to give these a bit of context as we look ahead to what is likely to be a challenging quarter for businesses in the South and elsewhere.

Whilst writing, I make no apology throughout this blog for dropping in song names and phrases from Legally Blonde: The Musical, which is playing at the Mayflower Studios MAST theatre in Southampton until 22 January (not only is it sponsored by Paris Smith, and playing in support of my son’s charity fund (Ben Pavitt’s Legacy of Love Fund), but its sound-track is, for me at least, the perfect antidote to insolvency statistics. The first person to message me with all 5 references to the show (in what follows) wins a free pin badge (normally £2)!

1. Are we failing to see the wood for the trees?

It sounds like I have a chip on my shoulder every time I say this, but each month when new official insolvency statistics are released, commentators immediately fixate on the short term. How do this month’s figures compare with last month, or even last year? Which business sectors appear to be hardest hit this month? Have personal bankruptcies gone up or down or stayed the same?

This sort of serious analysis is well and good, fills some prompt copy and helps to focus minds on the ready availability of help in terms of managing potential financial distress, but it doesn’t really tell us very much. If the pandemic should have taught us anything, it is that most people will respond in a positive manner to information which is supported by evidence and presented in a clear, digestible and consistent format. Unfortunately, the way we present official Government statistics is often too mired in jargon, largely irrelevant detail and/or there is just too much there. So let’s get this whipped into shape, shall we?

For me, the true story of the latest statistics, which are perhaps more meaningful than most because they take us to a calendar year end so it is easier for us to relate to the trends we are seeing, is how the increases in the number of corporate insolvencies quickly gathered a lot of pace as 2021 drew to a close. The number of business insolvencies in October 2021, for example, was almost 5% lower than the equivalent pre-pandemic month in 2019, then in November the numbers were suddenly higher than pre-pandemic levels by more than 11%. In December they continued to rise, but at a much more significant pace, at almost 33%.

On a graph this cumulative rate of increase would obviously show as a steep J-shape curve. If we isolate within the numbers just the creditors voluntary liquidations (where an insolvent business chooses to wind itself up), the curve is even steeper, with two-year rises of 19%, then 43%, then in December 73% on pre-pandemic levels. This, for me is the true story of the statistics we are looking at – whatever the reasons are, and whether or not this climbing curve is going to quickly slow and taper off in Q1 2022, the observed growth in formal insolvencies is undeniable, as is the fact that they are going to continue to rise for at least some time to come.

2. What do we think is at work behind the statistics?

There is one very clear conclusion we can draw from the statistics, which is that government policies (in the UK and through most of the world in fact) have suppressed for a very long time the ‘true’ number of realised insolvencies, both corporate and personal. These policies have typically included funds, loans and tax forbearance allocated to business and the prohibition of compulsory winding up activity against businesses by creditors, and on the personal side the advent of things like furlough pay to protect jobs which might otherwise have been lost, and the UK’s breathing space legislation which saw many tens of thousands of people seeking debt claim relief for the first time.

Naturally such policies cannot always solve debt problems in the long term, although they are theoretically designed to do this by delaying the point of insolvency long enough for the business or individual to earn their way out of their increased debt burden. In many cases, the reality is that the policies will have served only to store up a potentially unmanageable level of debt and to create what has been called ‘the insolvency gap’, i.e. the shortfall between formal insolvencies which have actually happened, and insolvencies which would have happened without those policies and which could very well still happen once those policies have all been relaxed. In this sense, insolvency management policy partially mirrors policies directed towards infection management, seeking to avoid a critical mass of problems which could endanger the overall system.

The latest statistics of course suggest that the insolvency gap is now coming very much into view, and what we are starting to see is business owners who have kept things going whilst the money was coming in, and whilst the hounds were being kept from the door, now deciding that enough is enough. We are not yet seeing this effect with personal insolvency numbers, but that is not surprising when we consider the shackles which have been placed on creditor action during the pandemic. Of course corporate insolvencies also tend to produce personal insolvencies after the event, for example when creditors faced with a dead loss in the business call in personal guarantees or when liquidators take action to recover directors’ loan accounts and other actions. The pressures which all of our home budgets are under in terms of energy bills and the rising cost of living generally clearly are not helping here either, so I don’t think there’s any serious doubt that there will be a significant rise in personal insolvencies as well.

3. How do we help business to manage and prepare for the risks we are seeing?

As far as the monthly commentaries usually go is to dish out the usual platitudes, such as how managers need to be watchful, and at the first sign of distress to seek advice from a qualified, regulated advisor. This advice is of course very sound to an extent, but let’s face it most business owners and managers haven’t really been in this position before and debt is all too often just the elephant in the room. Many who know their business, their customers, their sector intimately well lack the vocabulary to even talk about debt beyond their monthly cashflows, let alone to plan over the longer term for likely contingencies and to model different options for dealing with challenging trading periods. Many also fear (wrongly as it turns out) that talking to an insolvency practitioner, for example – i.e. someone who could actually help them bridge the gap in their own skills and experience – amounts to some sort of admission of defeat, and/or that it might result in competitors swopping in at the first scent of blood in the water.

I have a number of ideas, which must inevitably be beyond the scope of this blog (but which I am happy to chat about directly at any time, and/or to develop in a further blog subject to popular demand) about how we can all improve our dialogue around debt, and start to resolve the stigma associated with seeking help in financial terms. In the meantime, it might be of some assistance to think about where we were just a few years ago in terms of businesses talking about mental health in the workplace. Talking about debt and how to resolve it is, honestly, half the battle here so please do not be afraid to engage with your professional advisors, friends and even creditors about it, but start by knowing your business inside and out and keeping clear records of where you are going, what you can see on the horizon and how you plan to approach each fork in the road over the coming months.

Hopefully everyone is aware by now that the remaining restrictions on creditor action are expected to fall away by 31 March 2022, and that one of the most significant causes of business distress is bad debt, i.e. debts which are owed to the business and which are currently fully valued on your balance sheet, but which can fast evaporate if that debtor business or individual enters an insolvency procedure. Winding up petitions against customers, for example, have been virtually absent for the best part of 2 years, but there are definite signs now of those court lists filling up again, and some may have forgotten that the moment a winding up petition is issued, the company against whom that petition exists is no longer free to pay its debts, even assuming it has the cash to do so. This often causes what has been termed the insolvency domino effect, which is a very real phenomenon, particularly when supply chains are already stretched and in some of our most challenging sectors, such as construction, arts and entertainment, recreation, accommodation and food.

Summary

In conclusion, I think the latest official insolvency statistics – at least when they are placed in context – tell us rather more than might first meet the eye. Government policy in 2020 and 2021 may have lulled some into a false sense of security, but in the months and years to come, I can see the Secretary of State and private sector insolvency practitioners looking back on this period as one where businesses and individuals might regret not having been fully alive to the risks of insolvency, and moreover not making a clear note of what they perceive those risks to be and how they plan on tackling them. This, combined with taking the right advice at the right time, and acting on that advice, remains the single best way for company directors to avoid personal liability in the event of a future insolvency of their company.

If you would like to discuss any matter arising from this blog (including Legally Blonde, because frankly it is a brilliant show), please do not hesitate to contact me. Of course, if you just want excellent legal advice and/or someone to help steer you towards the right third party insolvency advice, you can equally contact any member of my Corporate Restructuring & Insolvency team.