Experts and non-experts alike predicted a wave of bankruptcies and insolvencies following the business disruption caused by Covid-19 in 2021. However, new filings globally were much lower than expected following historic levels of government support and easy access to cheap liquidity in the capital markets. Despite this, we expect new commercial filings to pick back up as government support around the world abates.
Bankruptcies and insolvencies will rebound in 2022
With the release of easily accessible vaccines, 2021 promised to be the year that everything turned around for industries that were hit hardest by Covid. But the Omicron variant has shown us that Covid is probably not going away anytime soon. And if Covid continues on its current path, we expect the hospitality, travel, tourism, commercial real estate, and in-person retail and event industries to experience a second wave of bankruptcy filings in 2022. While lenders showed great flexibility by doing whatever they could to avoid foreclosures and declarations of default in 2021, this flexibility cannot last forever, and the cold reality is that we are unlikely to see things return to “normal” any time soon.
US inflation reached its highest level in nearly four decades in the fourth quarter of 2021. While the Federal Reserve was initially quick to declare inflationary pressure “transitory”, there’s good reason to think that a more forceful monetary response is forthcoming. In December, a majority of Federal Reserve’s Open Market Committee projected at least three-quarter percentage point rate increases in 2022. While easy access to cheap liquidity has been a defining feature of the capital markets for years now, as interest rates rise, defaults will inevitably increase as businesses struggle to borrow and refinance. The pandemic’s duration means those companies that managed to extend liquidity runways at its onset may encounter new maturity walls or other liquidity shortfalls. Given the inflationary environment and the Federal Reserve’s aggressive posture, it’s likely that such companies will encounter less forgiving credit markets this time around.
England & Wales
Despite the UK experiencing the worst financial crisis in the last 300 years, restructuring and insolvency activity was notably restrained in 2020 and 2021. While there were some notable insolvencies in the high street retail and food sectors (Debenhams, Carluccios, The Hummingbird Bakery, Bonmarché, Arcadia and the UK arm of Victoria’s Secret among these) insolvencies were down overall compared with month on month statistics published by the Insolvency Service in previous years. In fact, formal company insolvencies in 2020 were at 12,557—their lowest annual level since 1989, with compulsory liquidations at their lowest since 1973. Similar figures are expected to be reported for 2021.
The reduction in corporate i insolvencies was due to a number of factors: Unprecedented government support, access to abundant liquidity from the corporate debt market (in part due to central bank stimulus), government-backed loan schemes, courts operating at reduced capacity, landlord credit to non-paying commercial tenants and overall reduced creditor action.
The most significant of the government-led support measures for businesses came via the Corporate Insolvency and Governance Bill (CIGA 2020), This introduced whole suite of temporary support measures, including furlough schemes, bounce back loans, a moratorium on statutory demands and the suspension of wrongful trading provisions. These provided a welcome—albeit in some instances, unsustainable—lifeline to many.
Recent figures suggest the economy is faltering and recovery trailing behind those of other major economies.1 Supply constraints remain a heavy burden. Combined with a restricted labor market, high energy costs and the negative impact of Brexit on UK trade, the outlook for 2022 is that of another challenging year for many sectors.
In terms of insolvencies, we might expect to see an increase in formal restructurings. The new Restructuring Plan introduced last year, has the potential to help to address how companies deal with liabilities now that support measures have ceased and we work in a reduced-growth, high-cost environment. Companies struggling financially that became so-called “zombie companies” during the pandemic—earning just enough money to continue operating and to service debt but lacking excess capital to spur growth—are likely to fold now that government measures are mainly at an end. It is perhaps indicative that the Q3 2021 insolvency statistics largely comprised of director-led insolvencies such as Creditors’ Voluntary Liquidations (CVLs).2
While the predicted tsunami of insolvencies may not transpire, we can expect an overall increase in insolvencies in 2022: Even if this is merely a correction on the unexpected statistics of the last two years.
Given the dearth of domestic commercial bankruptcy filings in 2021, the US restructuring community has turned its attention to China. Several real estate developers have defaulted in recent months following the introduction of regulations intended to decrease excessive levels of leverage. These defaults could be especially significant given the massive scale of the sector; by some estimates, the real estate sector makes up nearly 30% of Chinese GDP, nearly double the sector’s relative size in the US and most other developed economies. The distress of such a large sector, and particularly one as deeply interwoven with the financial system as real estate, poses a significant risk to the broader Chinese economy.
Given China’s key role in the already stressed global supply chain, a downturn in China would likely generate ripple effects globally, particularly at a time when the US commercial real estate sector can ill afford additional disruption. In 2021, the sector felt the effects of 2020’s retail bankruptcies, with several retail landlords following their tenants into Chapter 11. Meanwhile, the recent Omicron surge has put a pause on many return to office plans, further threatening the industry’s short-term outlook. As such, we will be closely monitoring the situation in China and any other catalysts that could trigger an uptick in commercial real estate bankruptcy filings in 2022.
According to data published by the Hong Kong Government’s Official Receiver’s Office, Hong Kong’s filings for compulsory winding-up petitions reached 461 at the end of 2021, up 2.6% from 449 in 2020. We anticipate this upward trajectory will continue in 2022, which is set to be another challenging year with the continuation of the pandemic and Hong Kong’s pursuit of a “zero-Covid” strategy. As the economic impact of the pandemic continues, businesses will remain under pressure—with small and medium enterprises likely feeling the pinch the most, notwithstanding the implementation by the Hong Kong government of various financial relief measures focused on supporting them.
Much like in other jurisdictions, the number of insolvency filings has been well below historic figures, by some reports representing as much as 40% from pre-Covid levels. Despite this dip in insolvency filings, insolvency practitioners in Australia point to three factors to predict a ripe environment for an increase in filings over the next 18 months. First, the federal government is no longer providing support to Australian businesses and safe harbor relief for Australian directors, yet restrictions on both borders and many businesses continue even though most of Australia has pivoted to a public policy position of living with Covid. Second, rising inflation raises concerns about how long historically cheap liquidity will continue and whether large amounts of asset-based lending create greater exposure for Australian businesses should asset prices fall. Third, the Australian Tax Office has resumed its enforcement efforts, and Australian banks are likely to follow suit with their own enforcement campaigns. These factors have led many to question how long zombie companies can hold on.
Legislative and regulatory developments in Asia will have an impact on global insolvency regimes
The city-state has long been an entrepot whose economy depends on international trade and domestic hospitality-related industries, and the pandemic has taken a heavy toll on the economy. While the temporary Covid relief measures implemented in April 2020 have helped softened the economic impact of the pandemic, it will be the new insolvency framework that will be put to test in the coming years.
The Insolvency, Restructuring and Dissolution Act 2018 (IRDA), which combined Singapore’s personal and corporate insolvency and debt restructuring laws into a single piece of omnibus legislation, came into force on July 30, 2020. The timely arrival of the new legislation provides a number of legal mechanisms that could help companies stay in business. The IRDA introduced or codified important corporate rehabilitation tools such as super-priority rescue funding (or debtor-in-possession funding), cross-class cramdowns in schemes of arrangement and prepackaged restructuring plans. The legislation introduced significant reforms designed to simplify and modernize Singapore’s insolvency framework.
The new legislation’s practical importance cannot be overstated. The IRDA provides a toolkit for companies to confront the challenges resulting from the pandemic and avoid liquidation. Given the economy’s reopening and an improving outlook, the new framework will play a critical role in allowing companies to restructure their debts and liabilities until operating conditions improve—rather than finding themselves simply placed in liquidation. A restructuring that postpones repayment of debt to creditors or compromises investor returns on a transitory basis would arguably be a better alternative to liquidation.
The IRDA also clarifies the ability of insolvency practitioners to enter into legal financing arrangements. For companies in liquidation or under judicial management, these arrangements could be an effective way of unlocking assets for the benefit of the estate.
The position in Hong Kong stands in marked contrast to the developments in Singapore. The current lack of a statutory corporate rescue procedure in Hong Kong means that there are limited options available to distressed companies to pursue restructuring efforts compared with other common law jurisdictions. The Court noted in the recent case of Re China Oil Gangran Energy Group Holdings Ltd,  HKCFI 825 that legislative provisions for corporate debt restructuring and rehabilitation were desirable, and the issues arising from the lack of such provisions have been brought into greater focus during the pandemic. In March 2020, the Hong Kong government announced that it would re-introduce a long-awaited Companies (Corporate Rescue) Bill at the Legislative Council in early 2021, which would bring Hong Kong more in line with international practice in other common law jurisdictions, including the UK. There will be a great deal of focus on the bill in 2022, which may be put to the Legislative Council soon, although the provisions will likely take some time to come into force. In the meantime, we expect Hong Kong courts will continue their proactive and practical approach with respect to cross-border and domestic insolvencies.
One such approach includes the Hong Kong courts recognizing offshore provisional liquidators appointed on a “soft-touch” basis, in which a company remains under the day-to-day control of the directors but is protected against actions by individual creditors. The purpose of such cooperation is to give the group the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors that would be achieved by liquidation (Re Constellation Overseas Ltd BVIHC (Com) 2018/0206, 0207, 0208, 0210 and 0212). However, 2021 saw the first Hong Kong decision refusing to assist offshore soft-touch provisional liquidators (in Re China Bozza Development Holdings Ltd  HKCFI 1235) because the Court had concerns about the protection of creditors’ interests. Mr. Justice Harris noted that many cases coming before the Hong Kong companies court involved company owners and boards of directors who were more interested in avoiding liquidation and where the creditors were not involved in or driving the process. He suggested that the Hong Kong Court should closely police the use of soft-touch provisional liquidation to avoid it being abused and to ensure that creditors are protected. Although each case turns on its own facts, an increase in insolvencies of such companies may result, as the Hong Kong Court ensures that the recognition of offshore soft-touch provisional liquidation is consistent with general insolvency law and principles in Hong Kong.
2021 also saw a major development in cross-border insolvency co-operation between Hong Kong and mainland China with the jurisdictions’ entry into an arrangement for mutual recognition of and assistance to insolvency proceedings between their respective courts. The arrangement, which is essentially a framework for cooperation, applies where the debtor’s center of main interest lies in Hong Kong and has principal assets, a place of business or representative office in Shanghai, Xiamen or Shenzhen (given the close trade ties of these cities with Hong Kong). Shortly after, Mr. Justice Harris allowed the first application for a letter of request to be issued by the High Court of Hong Kong to the Bankruptcy Court of the Shenzhen Intermediate People’s Court (in Re Samson Paper Company Limited (in Creditors’ Voluntary Liquidation)  HKCFI 2151) and in mid-December 2021, the Shenzhen Intermediate People’s Court handed down the first ruling by a mainland court under the arrangement, granting the application by the liquidators. This is a significant step forward in developing a cooperative insolvency process between Hong Kong and mainland China and addresses the need to provide practical assistance to Hong Kong liquidators in their administration of assets and affairs in the mainland. We are aware of several corporate insolvencies where liquidators are seeking to use the arrangement and will monitor with interest how Hong Kong and mainland courts develop this framework going forward.
We expect to see an increase in fraudulent insolvencies in the near-term
Where there is an increase in distressed debt, there is inevitably a greater potential for fraud. Business uncertainty may lead to an increase in fraudulent behavior as, under increasing pressure to hit earnings targets, directors resort to improper means to replace lost revenue. Therefore, we should expect to see more director fraud uncovered, including Ponzi schemes, investments in non-existent assets and false representations to creditors. For example, in England, the insolvency industry already reports fraudulent claims on the back of the bounce-back loans that companies applied for during the pandemic, reportedly costing the government over $20 billion in either fraud or creditor losses.3
To recover value for defrauded creditors, various antecedent provisions within the insolvency legislation allow a look back to previous transactions and behavior that might give rise to claims against third parties—potentially with deep pockets—including recipients of assets at undervalue or preferences. But hunting down and acquiring these assets is not a straightforward process.
Legal finance and asset recovery expertise will become increasingly important
Meritorious high value claims can be among an insolvent company’s most valuable assets. However, these claims often require significant financial resources to investigate and pursue, resources which a liquidator or judicial manager often does not have, resulting in the abandonment of potential claim. Legal finance from Burford allows stakeholders to pursue valuable claims that otherwise might be abandoned or settled—thus maximizing recoveries for debtors and for creditors.
We frequently receive case inquiries before insolvency events, from entities that are looking to use legal finance to avoid large legal fees, legal risk and/or potential liquidation that could accompany pursuing their large claims. In a number of jurisdictions, a common theme is that companies—particularly those in the mining, energy, and oil and gas sectors—with overseas or multijurisdictional projects face legal disputes with large counterparties that involve very large legal fees and disbursements. In those instances, legal finance can help companies during pre- or mid-insolvency processes, not just by providing a needed source of finance, but also by providing an additional source of expertise to assist the client throughout the life of a case.
When seeking assets from a company in insolvency—particularly where there is an element of fraud—creditors, insolvency lawyers and professionals may need to investigate company directors’ and officers’ assets. However, the true asset position of such potential targets is rarely clear at a case’s commencement. Specialized expertise will often be needed to investigate hidden assets to secure value in the event of a successful claim.
As the number of bankruptcies and insolvencies inevitably rises in the year ahead, judgment creditors will increasingly seek specific guidance and services from experts in asset tracing, intelligence gathering and enforcement techniques to help guarantee the design of a successful recovery strategy. Burford has an integrated in-house corporate intelligence and asset recovery business that combines capital provisions with top-level judgment enforcement to help creditors recover judgment debts while relieving the associated financial burden and risk.
Salina Brindle is a Vice President in Burford’s asset recovery business and is based in London. Prior to joining Burford, she was an associate at Moon Beever Solicitors (now Wedlake Bell) focused on contentious insolvency with an emphasis on recalcitrant debtors, judgment enforcement and injunctive relief.
Matt Lee is a Principal at Burford with responsibility for leading its businesses in Australia. An Australian- and US-qualified lawyer with trial, arbitration and appellate experience around the world, he works with companies, law firms, funds and investors engaged in complex commercial litigation and arbitration in Australia and in multi-jurisdictional disputes.
Quentin Pak is a Director who leads Burford’s office in Singapore with responsibility for expanding Burford’s resources to support clients in Asia. Prior to joining Burford, he was the head of the Asia commodities business at Commonwealth Bank of Australia.
Emily Tillett is a Vice President at Burford with responsibility for leading its investment activity and operations in Hong Kong. A Hong Kong, Australian and New Zealand qualified lawyer, Ms. Tillett has multijurisdictional expertise in complex commercial disputes. Prior to joining Burford, she was Of Counsel at Allen & Overy in Hong Kong.
 Q3 2021 growth was lower than expected with output remaining 2.1% below Q4 2019: Published by the Office for National Statistics on 12 February 2021 and GDP first quarterly estimate, UK: October to December 2020
 Insolvency Service Statistics for Q3 2021 recorded 3,765 corporate insolvencies (being the highest number since Q1 2020, and 90% of the Q3 2019) of which 3,471 were CVLs.
 Daniel Thomas, Financial Times, “UK taxpayers face billions in losses from Covid loan schemes”, November 2021, available at: https://www.ft.com/content/d5576d0e-ed4d-4087-b3b5-2bed6076dde4.