Corporate insolvencies to double in 2021, targeted action is needed warns RSM

  • RSM predicts a doubling of corporate insolvency in 2021, or in the 12 months after Government support is wound down; and
  • sustained levels of corporate insolvencies 15-20 per cent higher than the previous years (2017-2019) for up to three years.

Leading audit, tax and consulting firm RSM predicts that insolvencies will double in 2021 when Government support, such as the furlough scheme and bounce back loans, ends.

According the Insolvency Service there were 12,557 company insolvencies in 2020, down on the 17,225 the previous year.

The latest UK insolvency statistics for December 2020 showed the first uptick for 12 months, but the quarterly statistics showed that corporate insolvency levels still remain at very low levels, some 27 per cent lower than 2019 – highlighting that Government support is masking the extent of business distress in the UK.

RSM also expects to see increased levels of corporate insolvencies, 15-20 per cent higher than previous years, for up to three years once the Government support ends and UK business ramps back up.

Gareth Harris, Restructuring Advisory Partner at RSM said: ‘Whilst the unprecedented government measures were needed to support businesses through the economic shock caused by the Covid-19 pandemic, the measures may not be enough to rescue all businesses. In some cases they may only act as an avoidance or delaying measure for zombie businesses, unless other restructuring options are pursued.

‘The much lower insolvency statistics in 2020 suggest that there is a level of pent up, or delayed insolvency which is waiting to happen in 2021. Creditors have either been prevented from taking action by legislation; or have felt unwilling to enforce during this difficult period. However, as we start to emerge from Lockdown 3.0 and the vaccination programme starts to take effect this may no longer be the case.

‘The dramatic fall in GDP, Brexit complications and the third lockdown has seen predictions of hundreds of thousands of insolvencies.  However, the long-term trends, and the history of previous recessions would suggest that a more likely scenario is a spike of insolvencies in 2021, and then a sustained high level for a two to three-year period.’

The global pandemic has led to a sharp and significant increase in the level of corporate debt, and since March 20 over 1.5m UK businesses borrowing almost £71bn in Government backed loans. These figures exclude any other commercial loans from funders; HMRC deferred payments; arrears of rent; and any build up in trade debts – highlighting the current levels of exposure for many UK businesses.

Gareth Harris added: ‘The extent of corporate debt is acutely worrying and poses a real affordability risk for many UK businesses; which is why major UK funders have scaled up their business support teams, to assist with additional funding or forbearance requests, as well as potential future debt restructuring.

‘Businesses will need more targeted support to help healthy businesses that have faced extraordinary conditions to not only survive; but thrive in 2021. We are calling on the Government to implement a measured response when restarting the economy to avoid a cliff edge moment where businesses will be faced with the furlough, VAT deferral and rate schemes all ending, creating an untenable financial pitch point.

‘With the current high levels of Government expenditure and potential default risk of loans, the Chancellor has a difficult balancing act to manage; but he needs to take the opportunity in the forthcoming Budget to outline a detailed road map, so businesses can start to prepare ahead of the cut off points for each scheme in March and April 2021. 

‘Whilst UK business is robust and has shown resilience to get through the last 10 months it looks likely that there will be an increasing number of casualties in 2021; and businesses need to take steps now to mitigate any future risk.’