According to the Insolvency Service figures for England and Wales, company insolvencies rose in the second quarter of 2019 to 4,321, 2.6% higher than the first quarter of 2019 and 11.4% higher than the same quarter in 2018. This represents the highest level of insolvencies since the first quarter of 2014. This increase is due to higher numbers of creditors’ voluntary liquidations and, whilst administrations dropped slightly compared to the first quarter of 2019, they remain a significant feature within corporate insolvencies.
Whilst Company Voluntary Arrangements (CVAs) continue to receive much press attention, the number of CVAs is not increasing significantly and, in fact, is slightly lower now than it was in the same period last year.
There is no doubt that the trading environment for many companies within England and Wales is difficult. Different industries will have their own different economic pressures but as uncertainty appears to be a significant problem for most businesses, it seems likely that Brexit is having its impact on the solvency of companies. Many businesses are finding that they cannot cope with the uncertainty of what Brexit may bring and if suppliers or customers are unwilling to commit to long-term arrangements, many businesses will struggle to stay solvent.
In addition, those companies which have planned for Brexit and taken steps which have necessarily required additional, exceptional spending (whether by way of stockpiling or creating strategies to cope with what a post-Brexit market might look like), are now struggling to deal with that increased expenditure over a significant period of time as the deadline for Brexit has continued to move from one date to the next. These Insolvency Service figures may well show that for some companies, the emergency planning and spending in anticipation of Brexit may have caught up with their bottom lines and impacted significantly on their cash flows and rendered them insolvent and unable to continue to trade.
However, it is also worth bearing in mind that Brexit is unlikely to be the only reason for the increase in insolvencies. Sectors such as retail have been experiencing financial difficulties for some time now due to the outdated model of many high street retailers (having significant property liabilities in a market where on-line shopping is becoming more and more prevalent). Whilst some high profile retailers have explored CVAs in an attempt to find a way out of the problems caused by property liabilities, many of the CVAs have failed, leading to liquidations or administrations, and many of the smaller retailers with similar problems may be unable to consider CVAs and, instead, are having to proceed straight to administration or liquidation.
Given the current appetite amongst certain groups of creditors to challenge the legality of CVAs, the future for some companies remains uncertain. If the Courts ultimately determine that CVAs, particularly those in the retail sector which seek to compromise significant property liabilities, are limited in what they can compromise and how they can compromise it, the option of a CVA to potentially save a business from insolvency is likely to be far less feasible for many businesses. The result is that a company with liabilities which it cannot discharge will be left with little option but to enter administration or liquidation. That being the case, there is a very real chance that there will not be a substantial decrease in the near future from the current number of administrations and liquidations in England and Wales.