The corporate insolvency statistics for July 2024 published by the Insolvency Service showed that it was another worryingly busy month for business failures, although it was quieter than the preceding month. There were 2,287 insolvency filings, compared to 2,487. Nevertheless, this July’s figure was higher than the same month in any year since before the pandemic in July 2019.

As with many economic statistics, figures for individual months can be skittish. Longer term trends tell a more reliable story. The rolling twelve months total up to July 2024 was 27,138 for non-seasonally adjusted insolvencies, an all-time high. The total for 2023 was 26,776, which was the highest ever for a calendar year, just beating the previous record recorded at the height of the global financial crisis (GFC) in 2009.

A detailed analysis of the overall insolvency numbers also reveals how the insolvency market has been changed first by the GFC and then by the pandemic. It also shows that the bigger picture of apparently increasing corporate gloom hides a small but significant improvement in business rescue.

Insolvency market structural changes

Pre-GFC

Before the GFC, creditor enforcement was a major factor, with Compulsory Winding Ups (CWUs) accounting for around a third of all corporate insolvencies however much the overall level fluctuated. At the same time, pre-emptive action by Directors in putting their companies into Creditor’s Voluntary Liquidation (CVL) accounted for around half of insolvencies. In 2007, 33% of failures were CWUs and 49% were CVLs.

Between the GFC and the Pandemic

After the GFC, creditor enforcement began to tail off, falling to more like a fifth, while CVLs rose to two thirds. In 2019, 20% of failures were CWUs and 67% were CVLs.

The Pandemic years

Government action constraining creditor rights and the gross disruption of lockdowns and restrictions combined to change the insolvency pattern altogether. In 2021, 89% of failures were CVLs and only 4% were CWUs. In 2022, 84% were CVLs and 10% were CWUs.

Post-Pandemic

As we have emerged from the direct impact of the pandemic, the balance between the two different types of Liquidation is starting to revert. In 2023, CVLs had dropped to 81%, while CWUs rose to 13%. In the twelve months to July 2024, CVLs are down again to 79% and CWUs are up to 14%.

There is no definitive research available yet as to whether this is because creditors are recovering their appetite for enforcement, or if improving business confidence is making more entrepreneurs decide to battle on through their financial problems. It could simply be that post-pandemic battle fatigue is finally starting to fade.

Business rescue

There have been equally seismic changes in the use of the main rescue procedures, Administration and Company Voluntary Arrangements (CVAs).

The GFC

Both before the GFC and immediately afterwards, total rescue attempts were running at around 3,000 a year.  During the GFC this leapt to 5,000 a year, indicating that there was a far more positive approach to business problems then than we saw during the pandemic or we are seeing now.

Between the GFC and the Pandemic

Immediately before the pandemic, the combined Administration and CVA totals had fallen back to only around 2,000 – they were 1,952 in 2018 and 2,291 in 2019.

The Pandemic years

Business rescue almost came to a halt. There were just 965 in 2021 and 1,421 in 2022. Between them, the generosity of the government loan schemes pumping over £80bn into companies and the prevailing commercial uncertainty made business rescue either unnecessary or too difficult in many cases.

Post-Pandemic

Finally and at last, there are tentative signs of a return to positive action on saving struggling businesses. In 2023, Administrations and CVAs totalled 1,839 (up 29%) and the twelve months to July 2024 they were higher still at 1,984. Given the turgid performance of the UK economy during 2022 and 2023, this improvement is surprising.

A detailed yearly analysis of insolvencies between 2005 and 2024 can be found here.

What next for the insolvency market?

Historically, insolvency volumes are a lagging indicator during an adverse financial correction and in a recovery and growth phase. Increases come up to two years after the former and falls follow the latter by at least a year and often longer.

On this basis, overall figures may continue to rise gently for some time and the rate at which they eventually decline will be determined by whether the encouraging but still marginal GDP growth in H1 2024 can be sustained and even improved by the action promised by the new government.

What seems more certain is that the movement back from CVLs to CWUs will carry on. Business rescue is harder to call, but the recent increase in activity is encouraging and may well reflect anecdotal evidence that there is greater investment and lending capacity for turnaround situations than at any time since the start of the pandemic.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.