A predicted wave of insolvencies on the horizon has been a recurring theme in the UK press since the start of the first Covid-19 lockdown. Most people would have predicted that forced closure of businesses and the restriction on consumers' ability to spend would lead to an increase in business and personal insolvency numbers. In reality, the wave didn't appear - at least not yet. In this blog we discuss the reasons why and whether the trends we are seeing might suggest a wave is coming in 2023.

What stopped the wave?

What in fact happened following the first lockdown in March 2020 was that corporate and personal insolvency numbers started to drop. The main reasons for this were the UK Government's extensive support measures, including the various guaranteed loan schemes, the furlough scheme and the imposed restrictions on debt enforcement.

These measures, aimed at stopping a tsunami of insolvencies, worked well, or perhaps too well. Rather than just stopping an insolvency crisis, they actually resulted in numbers dropping significantly below pre-pandemic levels. This means that businesses that perhaps would have failed in the ordinary course were kept afloat and so post-pandemic we can expect to see an element of catch up.

Throughout the pandemic there were spikes of insolvency activity in certain sectors.

There was a sharp drop in casual dining outlets as restaurants were forced to close. Consumer habits were already shifting away from full-service restaurants and the lack of footfall and the staffing pressures further exacerbated by the pandemic proved too much for some and we saw several well-known names go through a restructuring or an insolvency process.

Issues the retail sector was facing pre-pandemic – such as changes in consumer behaviours, unaffordable rent liabilities and a switch to online shopping - were accelerated and compounded by the pandemic, leading to several high-profile failures such as Debenhams and Arcadia.

The start of the energy crisis due to the huge increase in wholesale gas prices led to several energy suppliers failing around the end of 2021/start of 2022, the largest being Bulb Energy which has been bailed out by the UK Government.

Generally though, and particularly with SME businesses that dominate the UK business market, restructuring and insolvency activity remained low throughout the pandemic and we would say the lowest since at least pre the financial crash in 2008.

Trends we are seeing

CVLs: The Government support measures were largely faded out during the first half of last year and we then started to see headlines talking of large increases in insolvency numbers. What the statistics show across the UK is that total corporate insolvencies in the second half of 2022 did increase significantly from the same period in 2021 (by approximately 40%), however, the numbers are skewed by large increases in creditors' voluntary liquidations (CVLs) with other insolvency processes remaining relatively static.

Despite their name, CVLs are a process initiated by the company itself, and so not usually as a result of pressure from creditors. The companies entering into CVLs are often shell companies with minimal assets or smaller trading companies where the directors have made the decision that they can't continue. The increase also consists of the post pandemic catch up mentioned above.

Late payments: Our corporate clients have been reporting increasing late payments by some customers throughout 2022 and this trend is backed up by various studies, including research by R3, the insolvency and restructuring trade body which showed that the number of late invoices in Scotland reached a peak in October 2022.

Director claims: Another trend we are seeing is an increased focus on directors' conduct, including the Insolvency Service being given new powers to investigate directors of dissolved companies. These new powers were a direct response to the much-reported bounce back loan fraud and abuse of the furlough scheme during the pandemic. On top of the clearer cases of fraud, the pandemic forced directors to make difficult decisions to survive and now that the dust has settled, these decisions are being scrutinised. Claims against directors is an area we expect to get busier over the next couple of years.

What lies ahead?

The trends mentioned above all point to an increasing level of financial distress in the market. With businesses that survived the pandemic now facing skyrocketing inflation, soaring energy prices, supply chain disruption and labour shortages it's understandable that market commentators are back to predicting a wave of insolvencies.

The last time we did see a wave in the UK was following the 2008 financial crisis. If we draw comparisons, a key difference is that now, unlike in 2008, there remains significant capital available in the market with a much increased number of sources of finance ready to deploy for the right deal. And so whilst financial distress appears inevitable, there are far more options than there were in 2008 to restructure or avoid terminal insolvency. Businesses should seek advice at an early stage to ensure the full range of options remain available.

UK businesses have also shown a level of resilience to survive the last few years that cannot just be explained by the Covid-19 support measures and we don't expect that to change. Do we think a wave is coming in 2023? There will be increased activity in the restructuring and insolvency market. The level of financial distress has increased but with various options available, it is worth obtaining advice at the earliest opportunity.


Jamie Nellany

Senior Associate

Louise Laing

Senior Associate

Lindsay Lee

Senior Associate