It’s been one of the surprises during 2020 that the level of corporate insolvencies has been lower than during 2019. In fact, insolvencies each month since March 2020 have been lower than similar months in past years. It’s a concern to see that the latest Insolvency Service stats show that there has been a change in that trend and there was an increase in company insolvencies during December.
Is this the first (and long feared) sign of the economy creaking under the strain of the Covid pandemic and associated lockdowns?
GDP fell by 8.9% in the 12 months to November 2020 and that would normally cause a rapid rise in corporate insolvencies. In fact, there was a fall in corporate insolvencies during 2020 due to massive Government support for businesses and the restriction on use of the courts to pursue debt.
The Channel Partnership rule of thumb is that the levels of corporate insolvencies tend to increase whenever GDP falls below +2% – so -8.9% should have led to a big spike. Yet that didn’t happen.
The Insolvency Service has reported 1,228 monthly insolvencies in December 2020, up by 9.2 per cent compared with December 2019. It’s the first increase since (pre-pandemic) February 2020
We’re all hoping that the role out of vaccines will allow some sort of return to normal and a release of pent-up consumer demand would provide a massive boost to the economy. But will it come soon enough to allow companies to survive, having battled with nearly 12 months of lockdown?
The UK Government, in common with other governments throughout Europe, recognises the key role that credit insurance plays in allowing companies to trade on credit terms with their customers and has extended the £10bn trade credit reinsurance scheme that was first put in place during 2020. The Channel Partnership remains committed to providing credit insurance advice, guidance and support to all companies concerned about the heightened risks of trading on credit terms during 2021, despite the fears of an increase in the levels of corporate insolvency.