Since the start of the Covid-19 pandemic, there were predictions of a “tsunami” of insolvencies on the horizon. Yet, despite the significant economic impact of the pandemic on both businesses and individuals, that much-predicted tsunami didn’t materialise.

That was in large part due to the extensive temporary business support and creditor protection measures, put in place by both the UK and Scottish governments during the pandemic. As well as the business loan and furlough schemes, businesses were largely protected from creditors taking winding up action, while individuals benefited from enhanced protections against debt enforcement and bankruptcy action.

Although the country is still recovering from the economic impact of the pandemic, as we approach the third anniversary of the first lockdown, the cost-of-living crisis has now replaced Covid-19 as the biggest financial challenge facing businesses and individuals across the country. However, unlike during the pandemic, there are not the support schemes or protections in place to insulate against insolvency, as the challenges of high inflation and rising interest rates, as well as increasing creditor pressure, come to bear.

Stuart Clubb is a partner with Shoosmiths in Scotland

This is reflected in the Scottish corporate insolvency statistics, which have seen a marked increase in the number of Scottish companies entering insolvency. The last reported quarter (October to December 2022) saw 313 total company insolvencies in Scotland, an increase of 19 per cent compared with the same quarter in 2021 and the highest number since Q4 2011.

It is also clear that creditor pressure is slowly returning to pre-pandemic levels, with January seeing the largest number of compulsory liquidations since November 2019. With no business immune to the effects of inflation and increasing costs, cashflow is more important than ever, and it therefore isn’t surprising to see an increase in creditors taking winding up action to recover their debts, a trend which is only predicted to continue.

And of course, an increase in the number of corporate insolvencies, coupled with increasing creditor pressure, will inevitably have an impact on individuals. However, in contrast to the corporate insolvency statistics, the story in the sphere of personal insolvency – where one would expect to see the cost-of-living crisis bite more acutely – is perhaps a surprising one.

The statistics show that the total number of personal insolvencies (both bankruptcies and trust deeds) between October and December 2022 has fallen year-on-year by 4.9 per cent, although applications for moratoria and for debt payment programmes under the debt arrangement scheme have increased. Taken in isolation, the number of bankruptcies fell by ten per cent, with debtor-led applications falling by 19.5 per cent. However, in contrast, the number of creditor led bankruptcy petitions increased almost threefold.

My colleague and joint head of litigation at Shoosmiths in Scotland, Andrew Foyle, has analysed the personal insolvency statistics and comments: “What these statistics suggest is that individuals are taking matters into their own hands – using moratoria to give themselves breathing space and proactively taking advice, leading to the increase in debt payment programmes. The fall in debtor-led applications suggests that most people are shying away from declaring themselves bankrupt, perhaps to protect assets, and are looking at alternative options.”

“Meanwhile, the significant increase in creditor-led petitions shows that additional creditor pressure is being brought to bear. The headwinds being seen in the corporate insolvency world means that creditors are unwilling or unable to exercise forbearance as they might have done during the pandemic and prior to the cost-of-living crisis. That is no doubt pushing individuals in debt towards alternative debt solutions.”

The picture that is painted by the latest insolvency statistics is therefore one of growing creditor pressure and action, with a significant increase in the number of creditor driven corporate and personal insolvencies. As the cost-of-living crisis continues to impact businesses and individuals, increased numbers of insolvencies in the months ahead seems inevitable. The predicted “tsunami” might yet materialise.

Stuart Clubb is a partner with Shoosmiths in Scotland

We survived Covid, but the ‘tsunami’ of insolvencies forecast then is still a threat - Stuart Clubb