As we approach the end of the second year since the pandemic started, and as the various elements of government support to businesses are withdrawn, the number of business insolvencies is starting to increase.
In recent weeks, I have noticed an increase in the number of calls I have had from business owners who are worried about their financial viability. This impression is supported by official data, with the quarterly insolvency statistics for July to September 2021, published at the end of October 2021, showing an overall 43 per cent increase in the number of company insolvencies in the third quarter of 2021 in England & Wales and an increase of 66 per cent in Scotland, compared with the same period in 2020.
This was primarily driven by an increase in the number of Creditors Voluntary Liquidations (CVLs) to the highest quarterly level since 2009. Many struggling companies that were being artificially kept alive during the pandemic by Government support, are beginning to fail now that the support is being withdrawn.
Although the number of CVLs in Q3 of 2021 was higher than pre-pandemic levels, the number of compulsory liquidations, driven by creditor action, has remained low. This is most probably due to the temporary restrictions on the use of Statutory demands and certain winding up petitions.
A breakdown of the statistics for England & Wales shows that whereas the number of CVLs increased by 86 per cent, the number of Company Voluntary Arrangements (CVAs), the process which enables a company to be saved rather than liquidated, actually fell by 68 per cent.
This fall in the number of CVAs may well be due to changes in the priority of payment of HMRC claims. Since September 2003, HMRC had ranked as an unsecured creditor alongside other creditors in an insolvency. However, this all changed on December 1 2020 when HMRC become a secondary preferential creditor, ranking behind employees, in respect of deducted taxes, such as VAT, PAYE, NIC and CIS.
What this means in practice is that in a formal insolvency, HMRC must be paid in full before any funds are available to pay the general body of unsecured creditors, and that includes a CVA.
Depending on the level of HMRC debt, what would previously have been a viable CVA proposal producing a reasonable return to all creditors could now be unviable as far as unsecured creditors are concerned.
For any business or company that is struggling or is likely to struggle financially, the key to success is to take professional advice before it is too late. If you have any queries or require any help, please contact:
Christopher Brown
chris.brown@hartshaw.co.uk Tel. 0114 251 8850
Business Recovery & Insolvency Partner
Hart Shaw LLP
