With the latest government data showing growth in company insolvencies, Chris Bowers, a partner in the Insolvency and Debt team at Forbes Solicitors, looks at why it might signal a return to pre-COVID levels of director disqualifications.
The latest monthly Insolvency Service statistics show there were 2,315 registered company insolvencies in October 2023. This is 18% higher than the same time last year and followed reporting in September that revealed the highest number of insolvencies during the last two quarters since 2009.
Data about firms going out of business often provides insight into tough economic conditions and trading challenges in particular sectors. This is undoubtedly true, however, growth in business insolvencies may also be indicating another sign that we’re heading towards a spike in how many company directors are disqualified.
Unintended effects
Government support measures introduced during the COVID-19 pandemic helped companies avoid insolvency, at least in the short term. State-backed grants and loans provided businesses with quick access to finance that boosted cash flow to keep them afloat. Although this genuinely helped protect businesses from the disruption of lockdowns, it also papered over the cracks for already-failing enterprises. Unanticipated, one-off cash injections enabled struggling businesses to survive a little bit longer.
Insolvencies are now increasing, in part, because COVID-19 lifelines have run out, and we’re seeing a similar unintended link between government pandemic support and a rise in director disqualifications. Several Bounce Back Loans were improperly acquired and used by individuals and the government is taking action to address this.
Loan losses
It’s estimated that losses from fraud and error associated with the Bounce Back Loan scheme amount to £1.1billion. This is according to figures published in the Department for Business, Energy and Industrial Strategy’s annual accounts. These losses are being chased down by the National Investigation Service, police units across the UK and the Insolvency Service.
Such action saw over 450 directors disqualified by the Insolvency Service between 2022 and 2023 for abusing COVID-19 financial support schemes. Enforcement action of this nature accounted for around half of all director disqualifications during this year.
This upward trend is accelerating. Last year, an average of 38 directors per month were being disqualified for abusing COVID-19 financial support schemes. So far this year, the monthly average has reached 63 disqualifications, with a total of 438 directors already disqualified for allegations relating to abuse of pandemic financial support, according to Insolvency Service data for April to October 2023. Disqualifications of this type currently account for 67% of all disqualified directors.
These recent trends suggest we’re heading for a spike in annual director disqualifications and a return towards pre-pandemic levels. Data from the Insolvency Service shows that during the decade from 2011 – 2021, the total number of director disqualification orders and undertakings averaged 1,238 per year. Annual figures have been lower since 2020, with disqualifications varying between 818 and 1,030 per year.
Based on current averages, total disqualifications for this financial year could top 1,100 and it’s reasonable to think the figure could be higher, as a tough crackdown on Bounce Back Loan fraud continues.
Fraud vs. misuse
There have been high-profile cases of Bounce Back Loan fraud reported in the media, with various organisations aiming to make an example of people who exploited government schemes. There have been prosecutions of directors setting up fake companies to access loans and instances where these same companies have been quickly dissolved.
What is less reported, and a factor that directors need to be aware of, is the differences between fraud and misuse. Lenders who administered the loans applied eligibility criteria, with part of this covering the usage of loan funds and the requirement for loans to provide an economic benefit to a business. ‘Misuse of facility’ is still likely to be flagged as fraud by lenders, and directors need to ensure they appropriately consider and address this.
Undoubtedly, hundreds, and possibly thousands of directors will receive letters about Bounce Back Loans over the coming months, and we’re likely heading towards a spike in director disqualifications next year. The government is pressing hard to recoup losses and to also show that it will punish exploitation of its emergency measures. Directors need to ensure their interests are properly protected amidst mounting enforcement action.
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At the end of Q2 2016, the Insolvency Service estimated that 3,617 corporate and SME companies entered insolvency, a number that is 2.7 % lower than the same period in 2015. For personal bankruptcies, the estimate is that 3,537 bankruptcy orders were granted which is 11.2 % lower than the same period in 2015 and the lowest since Q3 1990.
However, unlike the corporate and SME sectors, total personal insolvency, including bankruptcy filings, Debt Relief Orders (DRO) and Individual Voluntary Arrangements (IVA), was up 22.4 % from Q2 2015. The lower personal bankruptcy filings were offset by higher DROs, which were 15.6 % higher in Q2 2016 versus Q2 2015, and IVAs which were 42.7 % higher in Q2 2016 than in Q2 2015.
To tell us more about trends within consumer and SME insolvencies in the UK and the implications for credit grantors, Finance Monthly interviewed Andrew Berardi – PRA Group Europe’s Managing Director for UK Insolvency Investment Services.
Why have corporate and SME insolvencies fallen?
One needs to dig deeper into the corporate insolvency figures to find possible clues. For instance, one statistic shows that Compulsory Liquidations, where a credit grantor pushes the company into a bankruptcy or winding up order, decreased by 14 % between Q2 2015 and Q2 2016. Also, total company liquidations stand at the lowest since comparable records began in 1984. It is clear from the figures that credit grantors are giving their corporate and SME clients “breathing space” and in some instances, providing a life line by re-writing loans, finding additional financing, and even forgiving some loan principal.
The resurgence of Private Equity after the financial crisis has also provided a lifeline to struggling entities through funds designed specifically to invest in turnaround situations. The Insolvency Service website in the UK also publishes interesting statistics regarding insolvency by specific industry types; construction and retail/wholesale trade seem to have the highest incidents of insolvency proceedings.
A final statistic, and one not included in the official corporate insolvency statistics, is that companies entering liquidation after administration have risen by 33 % from Q2 2015 to Q2 2016. As trading conditions get tougher, this could be a harbinger for a rise in future corporate and SME insolvency proceedings.
What is driving the changes in personal insolvency filings in the UK?
Despite the fall in personal bankruptcy filings, overall consumer insolvency filings are on the rise. The statistics show that the fall in bankruptcy filings is confluent with the rise in DRO filings. In October 2015, the DRO protocol was relaxed so that consumers with £20k in debt (£15k in the previous DRO protocol) and £1k in asset (£300 in the previous DRO protocol) could access the DRO protocol. The relaxing of these guidelines has resulted in greater access to the DRO protocol for a population of consumers who may have otherwise had to petition for a bankruptcy as their only viable debt forgiveness option.
However, the causes for the rise in IVA filings are less certain. Evidence suggests that the IVA protocol has been marketed to a broader range of consumers who are now aware of the many benefits of an IVA as compared to other forms of debt forgiveness arrangements. Additionally, changes in the regulatory landscape may mean consumers are being directed away from unregulated Debt Management Plans (not considered insolvency) and increasingly advised to consider a regulated debt forgiveness scheme such as IVAs. Regardless, the increase in IVAs cannot be ignored.
What should credit grantors do to maximize recoveries on credit products defaulted due to insolvency?
Recoveries on insolvency proceedings can be lengthy and unpredictable, and in the case of DROs, credit grantors should not expect any recovery. Whether your customer is an SME or consumer, it is important for credit grantors to engage in the process by:
- Engaging with the insolvency practitioner, bankruptcy trustee, or administrator appointed to the case.
- Processing and responding to the paperwork in a timely and accurate manner.
- Lodging your proof of debt along with supporting documentation such as statements, invoices, etc. where and when requested.
There are specialist service providers who can assist your department with these tasks for a fee. Another way to maximize recoveries may be to sell the insolvencies to an FCA regulated specialist debt purchaser such as PRA Group.
How can PRA Group assist UK credit grantors to maximise their recoveries from SME and Consumer insolvencies?
As a highly respected and recognised global leader in the purchase of nonperforming personal and SME credit products, PRA is also one of the industry leaders in purchasing many types of consumer and SME insolvencies including IVAs; CVAs – an IVA for SMEs; Trust Deeds – the Scottish equivalent to an IVA; and bankruptcies.
With insolvency purchasing capabilities in the UK, Germany, U.S., and Canada, there is a good chance your organization can benefit from PRA’s insolvent debt purchasing expertise. Our insolvency team consists of industry veterans who are highly regarded for their ability to structure debt purchase solutions that are customised, compliant, and transparent.
What are the key considerations to make when managing acquisition of bankrupt and insolvent consumer debt? What are the most common challenges that you are faced with?
Sellers of insolvent consumer debt should be clear on the internal strategic purpose for selling insolvent debt. As indicated above, insolvency proceedings can be administratively burdensome for an internal recovery operation and therefore many sellers like the idea of a “forward flow” whereby the buyer assumes the administrative responsibility of managing the insolvency. Some sellers simply prefer to enter into periodic “spot sales” to fill a recovery gap or accelerate the recovery from the insolvency. In being clear on the strategic purpose, PRA can then structure a purchase solution right for the Seller. Another common challenge we have as a buyer of insolvent debt is the quality of the data. Certain insolvency-specific data (such and insolvency start date and insolvency type) is important to ensure the best price. Given PRA’s extensive experience with these debt types, we are often able to supplement seller data through our data warehouses, which ensures the best possible price for the seller.
As a thought leader in this segment, how are you developing new strategies and ways to help your clients?
We are very much an active participant within the insolvency industry, which, in my opinion, assists everyone in the insolvency chain. Throughout the regions we operate, PRA maintains strong working relationships with Trustees, Practitioners, regulators, creditor liaisons, and consumer advocacy groups. In the UK, PRA maintains representation on the standing IVA working committee. In the US, we have implemented a hybrid “service to buy” solution, which gives sellers the best of both solutions.
Career Highlights
- In 1993, Andrew joined Bear Stearns Companies Inc. to help establish and grow a first ever debt purchasing platform for consumer insolvencies in the United States.
- In 2003, while still with Bear Stearns, Andrew moved from New York to London to build and grow a first ever debt purchasing platform for consumer insolvencies in the United Kingdom.
- In 2014, Andrew joined the PRA Group after a 5 year period working with a boutique investment advisor where he established the first ever Private Equity style fund dedicated exclusively to the purchase of consumer insolvencies in the UK.
Food for Thought
What would be your top 3 tips for going the extra mile?
- Be as clear as possible regarding objectives and the desired outcomes
- Surround yourself with talented people and give them guidance and autonomy
- Endeavour to be two steps ahead of the competition
What does a typical day in the office look like for you?
At some point, one’s career evolves to where there is no typical day in the office. However, every good day involves some combination of strategic dialogue, data analysis, and client centric activity … all in the same day.
What inspires you to press further into your work?
Mentoring younger people who are passionate about building the business and building their career within PRA Group. I very much enjoy meeting our clients and ensuring the business is doing everything it can to meet their needs. Last, but not least, I enjoy one on one meetings with Insolvency and Turnaround professionals who are passionate about rescuing small business, and, for those practicing on the personal insolvency side, passionate about helping consumers to resolve their debt problems and move forward with their lives.
Email: Andrew.berardi@pragroup.co.uk
Andrew always has plenty of time to speak to those who have a shared interest in trends within the insolvency market or wish to better understand PRA’s debt purchase capabilities.
