Over the last two and a half years, two primary factors have influenced the number of insolvencies seen worldwide: Government support measures introduced during the pandemic and the global economy. The impact of both these factors can be seen in the insolvency statistics across this period, with lower levels of insolvency filings at the height of the pandemic while government support was being used, and higher levels in the post-peak era when the global economy began to turn.
According to the latest quarterly statistics for Q2 2022 available from England’s Insolvency Service, Creditors’ Voluntary Liquidations (CVLs) are at their highest since 1960, when records first began. CVLs are a process whereby a company’s shareholders, usually also the directors, agree to cease trading and the company’s assets are liquidated to pay creditors.
This article takes a closer look at the current state of corporate insolvencies in the UK and elsewhere and how legal finance can be used for the benefit of the insolvent estate.
Insolvencies were lower than expected during the pandemic
In 2020, during the height of the pandemic, there was a 27% decrease in corporate insolvencies in England and Wales compared to 2019. Globally, insolvencies fell by a cumulative 29%. Extraordinary government support buoyed up viable businesses that would have otherwise failed due to liquidity crisis following reduced business activity from lockdowns. In England alone, government Covid support measures totaled some £69 billion for business support schemes. This was further backed by restrictions on creditor actions against companies and separately, low interest rates which made borrowing cheap.
Any government support was largely indiscriminate. While viable businesses welcomed such relief, it offered an unsustainable lifeline to struggling companies. This led to an artificial lull in the expected trend of insolvency statistics. However, the effects were as intended: There were a lower number of corporate insolvencies during the pandemic than there might otherwise have been without such support measures.
With the end of government support those unsustainable businesses have since been tipped into insolvency procedures. The number of companies being declared insolvent in August 2022 was 42% higher than in 2019 before the pandemic in what amounts to a correction of the insolvency statistics seen during the pandemic period.
A similar pattern has been seen in Europe and elsewhere. In the US, following the government’s stimulus packages and subsequent withdrawal of that support. Bankruptcy filings in the US have been rising in 2022 with Chapter 11 filings totaling 466 in August 2022, an 81% increase from the 257 registered in July.
The current economy’s impact on rising corporate insolvencies
Given its reliance upon Russian energy and agriculture, Europe’s supply chain has been heavily impacted by the invasion of Ukraine. This has led to soaring energy and fuel prices for businesses, compounded by labor shortages and the depreciation of currencies against the US dollar, such as the pound, which hit record lows in late September.
Inflation in the Eurozone reached a high of 10% in September (up from 9.1% in August). The cost of borrowing continues to increase, and consumer confidence is low. With no signs of relief on the horizon, businesses will be feeling the impact of this unique confluence of factors for some time to come.
Particularly vulnerable industries include the retail and food sectors due to the rising cost of living and consumers reducing their discretionary spend. The construction industry is also expected to suffer given its particular sensitivities to fluctuations within supply chains.
Ultimately, in a world still recovering from the aftershocks of the pandemic, the ongoing impact of high inflation, cost of borrowing, soaring energy prices and tightened consumer spending, we can expect insolvencies to continue to rise in the coming months.
Increased insolvencies and an uncertain economy will drive the need for capital support
In uncertain times, demand for legal finance solutions will increase as insolvency practitioners seek financial support for the pursuit of meritorious claims within the insolvent estate either by way of assignment of claims or funding those they choose to retain.
Liquidations will often involve recalcitrant directors that create costly obstacles to enforcement by evading service, moving to debtor-friendly jurisdictions and layering assets in complex offshore structures. This is where early engagement of asset recovery expertise can also be beneficial to the estate.
As the world’s largest provider of legal finance and with its own dedicated in-house asset recovery team, Burford is an ideal partner for the insolvent estate, with the provision of both the capital and the expertise to pursue complex litigation and enforcement strategies, often achieving early recoveries to the ultimate benefit of creditors as a whole.
Learn more information about Burford’s insolvency financing solutions.