Corporate insolvencies rise by almost three quarters – Is there cause for concern? 

The latest monthly statistical update from the Insolvency Service has revealed that the number of company insolvencies in August was up 71 per cent compared to the same month in 2020.

In total, 1,348 entered into insolvency arrangements during August 2021. This is comparable to pre-pandemic figures – 1,366 company insolvencies in August 2019.

The most common form of insolvency was Creditors’ Voluntary Liquidations (CVLs), with 1,256 applications made for this process.

A CVL allows a company to close while dealing with all outstanding company debts. The aim is to maximise returns to creditors through the sale of various assets, however, not all debts are always repaid during this process.

Although there has been a rise in CVLs, other forms of insolvency, such as compulsory liquidations, remain lower than pre-pandemic levels.

Why were insolvencies so low in 2020?

The events of 2020 would suggest that many businesses were in financial trouble due to the various restrictions they face, and yet insolvencies were largely subdued by the financial support that has been available, such as the loan schemes, tax deferrals and furlough.

Temporary restrictions on the use of statutory demands and certain winding-up petitions, leading to company compulsory liquidations, has also helped stave off a lot of company failures during this period.

Why are company insolvencies rising now?

The Insolvency Service has said that it is not “possible to state the direct effect of the pandemic on insolvency volumes” as it does not record the specific reasons for each insolvency.

Oddly enough, it is during this period of relative recovery that many businesses are facing the greatest challenges, including:

  • The end of the furlough scheme
  • A growing number of late payments from suppliers
  • Increases to the cost of goods and services
  • The repayment of loans and finance taken out during the pandemic
  • A difficult labour shortage
  • The withdrawal of other support mechanisms, like the temporary VAT reduction in the hospitality sector.

These are just a few of the reasons that insolvencies seem to be on the rise at the moment and most relate to a simple issue – cash flow.

Businesses simply cannot operate if they do not have enough money coming in to meet their costs or service their debts. It is the reason why a cash flow crisis is the most common reason for business failure.

If you are finding it difficult to manage your debts or maintain healthy cash flow, then you must seek help. To find out how our team can assist you, please contact us.

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