As company insolvencies reach a ten-year high, business recovery and insolvency experts at PKF Smith Cooper consider how the pandemic has affected insolvency levels in the UK since 2020.

The total number of registered company insolvencies in the first quarter of 2022 was 4,896, the highest in a single quarter since the second quarter of 2012 (The Insolvency Service, 2022).

The figures are, unfortunately, not surprising in the current economic climate, where business owners face high inflation as well as the financial repercussions of the COVID-19 pandemic.

In addition to economic disruption, the pandemic brought about major and enduring social change that altered consumer behaviour and placed new expectations on businesses.

Looking back to the start of the pandemic, we consider some of the key factors that have contributed to the rising number of corporate insolvencies over the past two years.

Changes to consumer culture

Consumer spending reduced drastically in 2020, with national and local lockdowns throughout the year forcing physical stores to close and the general public to stay at home. That year GDP experienced its largest decrease (9.7%) in value since official record-taking began in 1948.

People who were willing to spend turned to online shopping, preferring the convenience and safety of e-commerce to visiting stores in-person. According to a recent study by Credit Karma, approximately 70% of people in the UK now prefer buying online to shopping in-store. Before the pandemic, this percentage was less than 50%.

Although the popularity of online shopping was on the rise long before the arrival of COVID-19, the pandemic accelerated the changes to consumer behaviour and many businesses were left scrambling to keep up.

Move to digital

Lockdown store closures meant business owners had to find new ways to serve their customers remotely. E-commerce’s share of global retail trade increased from 14% in 2019 to 17% in 2020 as online retail became critical to the survival of many companies.

When stores re-opened, businesses were required to make further changes to accommodate social distancing and other Government-enforced safety measures designed to ‘stop the spread’ of COVID-19. Customer expectations also shifted, with digital menus and the option to order via mobile app becoming the norm.

A global survey by McKinsey found that the pandemic caused companies to accelerate the digitalisation of customer interactions, plus internal operations,  three to four years quicker than initially anticipated.

Although digitalisation presented opportunities for businesses to advance and expand, these technological changes came at a cost that was felt the hardest by businesses experiencing financial problems such as debt, cash flow issues and limited capital. The Bank of England reported that outstanding corporate debt within the UK rose by £79bn between the end of 2019 and the first quarter of 2021. Small and medium-sized enterprises (SMEs) were the worst hit with debt rising by 25%.

The Government introduced financial lifelines, such as ‘Bounce Back’ loans, in an attempt to reduce the impact of the pandemic but strict eligibility criteria restricted access for many businesses in need. Business owners who could not fund the move to digital operations inevitably suffered a loss to their income, and those already at risk of insolvency found themselves in an ongoing struggle for survival.

End of Government protection

In addition to financial aid, temporary measures were introduced by the Government to protect businesses at risk of insolvency from creditor action. The Corporate Insolvency and Governance Act 2020 prevented corporate insolvency by temporarily restricting creditors from issuing winding up petitions until the end of September 2021.

In October 2021, new insolvency restrictions were put in place:

  • The debt threshold for winding up petitions was raised to £10,000 to protect businesses from creditors wanting repayment on small debts
  • Creditors were required to seek payment proposals from a business, which gave the business 21 days to respond before creditors could issue a winding up petition

A Red Flag Alert report from Begbies Traynor revealed that 589,168 businesses in the UK experienced ‘significant financial distress’ during the final quarter of 2021, a 5% increase from the previous three months. There was also a 106% increase in County Court Judgements, often the first step in creditors seeking legal action for debt repayment and an indicator of future insolvency.

What to do if your business is at risk of insolvency

If your business is struggling financially, it is vital to seek professional advice as soon as possible. A Company Voluntary Agreement (CVA) administered by a licensed Insolvency Practitioner could give you valuable breathing space from creditors through the negotiation and agreement of a formal payment plan.

Our expert team of licensed Insolvency Practitioners can discuss the options available to you and support you and your business in taking the next step. Contact us today to find out more about business recovery and insolvency services at PKF Smith Cooper.