Will 2021 be the Year of Insolvency?

Despite talk of new variants, there is a light at the end of the ‘pandemic tunnel’ as vaccines are being rolled out across the nation and there is hope of a return to normal life. That said, there can be no doubt that the full impact of Covid-19 has not yet been felt.

National lockdowns forced various companies to close and many that remained open suffered business interruption (please look out for our Blog on the FCA business interruption insurance test case). So, whilst Chinese New Year brings in the Year of the Ox on 12 February 2021, this year is likely to herald the year of insolvency owing to Covid-19. This certainly appears to be the case, according to data from Euler Hermes, predicting that the Global Insolvency Index may reach 35% this year. 

According to recently published figures, the US is likely to record the highest rise in insolvencies compared to 2019 – a somewhat alarming 57%. That said, other European countries are not far behind – Spain at 41%, Italy at 27%, and France at 25%. Closer to home though, the UK is predicted to see a rise of 43%1.

Whilst some sectors have coped well, such as IT and pharmaceuticals, others have fared less favourably, most notably hotels and restaurants, non-essential retail, automotive, and transportation. Such companies will be understandably nervous when we emerge from lockdown and we return to business as usual (whatever that looks like). Resuming business in a partially restricted Covid-19 environment is likely to increase the financial pressures on these already vulnerable businesses and see an increase in working capital demands. There is also the spectre of large established companies failing and the likely domino effect this will have on supply chains.

You may wonder why we did not see many insolvencies in 2020? The reason for this is that the Government and the courts have imposed emergency powers to delay proceedings and put insolvency cases on hold. For example, the well-publicised moratorium on statutory demands and winding-up petitions in the UK. For some, this has only put off the inevitable, and practically speaking, translates into a large backlog of cases, which will take time to process. Outside the courts, Government intervention and loan support, such as the BBLS and CBILS, has also created some temporary respite, and in other cases, stimulus.

For these reasons, the full impact of Covid-19 is yet to be felt, but it is surely coming (to coin the GoT vernacular), and some businesses may need to be ‘as strong as an Ox’ to survive.

Andrew Carter (research undertaken by Ben Greenwood)

1https://www.eulerhermes.com/en_global/news-insights/economic-insights/Calm-before-the-storm-Covid19-and-the-business-insolvency-time-bomb.html

 

 

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