Most people would have predicted that forced closure of businesses and the restriction on consumers’ ability to spend would lead to an increase in business and personal insolvency numbers. In reality, the wave didn’t appear – at least not yet.

What happened following the first lockdown in March 2020 was that corporate and personal insolvency numbers started to drop. The main reasons for this were the UK Government’s extensive support measures, including the various guaranteed loan schemes, the furlough scheme, and the imposed restrictions on debt enforcement.

These measures worked well, or perhaps too well. Rather than just stopping an insolvency crisis, they resulted in numbers dropping significantly below pre-pandemic levels. Businesses that perhaps ordinarily would have failed were kept afloat and post-pandemic, we can expect to see an element of catch-up.

Jamie Nellany is a Senior Associate, Brodies LLP

Throughout the pandemic, there were spikes of insolvency activity in certain sectors. There was a sharp drop in casual dining outlets as restaurants were forced to close. The lack of footfall and staffing pressures further exacerbated by the pandemic proved too much for some and we saw several well-known names go through a restructuring or an insolvency process.

In the retail sector, changes in consumer behaviour, unaffordable rent liabilities and a switch to online shopping were accelerated by the pandemic, leading to several high-profile failures. And the huge increase in wholesale gas prices led to several energy suppliers failing around the end of 2021/start of 2022.

Generally, and particularly with UK SMEs, restructuring and insolvency activity remained low throughout the pandemic, and we would say the lowest since at least pre the financial crash in 2008.

As government support measures were phased out during the first half of last year, we started to see headlines talking of large increases in insolvency numbers. UK statistics show that total corporate insolvencies in the second half of 2022 did increase significantly from the same period in 2021 (approximately 40 per cent), but the numbers are skewed by large increases in creditors’ voluntary liquidations (CVLs) with other insolvency processes remaining relatively static.

Despite their name, CVLs are a process initiated by the company itself, so not usually because of pressure from creditors. The companies entering into CVLs are often shell companies with minimal assets or smaller trading companies where the directors have made the decision that they can’t continue.

The increase also reflects the previously mentioned post-pandemic catch-up. Research by insolvency and restructuring trade body R3 highlighted a trend of increasing late payments with the number of late invoices in Scotland reaching a peak in October 2022.

We are seeing an increased focus on directors’ conduct, including the Insolvency Service being given new powers to investigate directors of dissolved companies - a direct response to the much-reported bounceback loan fraud and abuse of the furlough scheme during the pandemic. The pandemic forced directors to make difficult decisions to survive and now that the dust has settled, these decisions are being scrutinised. Claims against directors is an area we expect to get busier over the next couple of years.

This all points to an increasing level of financial distress in the market. With businesses that survived the pandemic now facing high inflation, soaring energy prices, supply chain disruption and labour shortages, it’s understandable that market commentators are back to predicting a wave of insolvencies.

The last time we saw a wave in the UK was following the 2008 financial crisis but unlike in 2008, there remains significant capital available in the market with more sources of finance ready to deploy for the right deal. So, while financial distress appears inevitable, there are far more options than there were in 2008 to restructure or avoid terminal insolvency.

UK businesses have shown a level of resilience to survive the last few years that cannot just be explained by the Covid-19 support measures and we don’t expect that to change. Is a wave coming in 2023? There will be increased activity in the restructuring and insolvency market but with various options available, it is worth obtaining advice at the earliest opportunity.

Jamie Nellany is a Senior Associate, Brodies LLP

After surviving the pandemic businesses now face a wave of insolvencies - Jamie Nellany