Crumbs of comfort to be found amidst grim insolvency figures: David Higgins

One clear indication about how severe things are right now came in the latest report from the Insolvency Service.

It showed that company insolvencies during May were 40 per cent higher than the same month last year.

There were also steep rises in Creditors’ Voluntary Liquidations (CVLs), compulsory liquidations and administrations.

Even though the data was a snapshot of the situation in May, it was not due to lots of businesses suddenly failing as a result of circumstances which arose that month.

Some of the companies whose demise it recorded might well have been in trouble before the pandemic and were only really sustained by Government-backed loans designed to ease the commercial effects of Covid-19.

That is an argument reinforced by figures made available by the Department for Business and Trade, showing that just over £3.5 billion of the £77 billion paid out through the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme went to firms which are now in arrears or have defaulted.

In addition, of course, the Corporate Insolvency and Governance Act 2020 gave companies breathing space to try and resolve their difficulties, including a moratorium on creditor action.

However, when creditors were once again able to pursue what they were owed, it was always likely that that enfeebled firms would be exposed.

Nevertheless, I think that there are still crumbs of comfort amidst the grim reading which is the Insolvency Service research.

The rise in Creditors’ Voluntary Liquidations (CVLs) suggests that directors are trying to seize the initiative and prevent further losses by exploring whether viable parts of their companies can be saved.

An increasing number of directors are not, it would seem, simply waiting for the end to come and for someone else to pull the plug.

Furthermore, the increase in administrations suggests that there are more companies still capable of being rescued as a going concern rather than simply being shut down.

Of course, all directors should be aware of their duty to make a decision about what to do if they believe that their companies might become insolvent.

The legal obligation which directors have to consider the interests of creditors in such circumstances was underlined by a Supreme Court ruling in October last year.

Failing to fulfill those duties would leave them in danger of being guilty of wrongful trading – something which, in turn, might result in their being personally liable for a company’s debts.

If there are any doubts about whether a business can continue, it is vital to act immediately that it becomes apparent.

The earlier that directors seek advice from their solicitors, accountants or an insolvency practitioner, the more options they may have to salvage all or part of an enterprise which they may have spent many years and a lot of effort and cash developing.

David Higgins is an Insolvency Partner with Bexley Beaumont