Richard Bathgate

According to the latest figures, the number of corporate insolvencies in Scotland stayed the same in Q4 2021-2022 (January-March 2022) compared with the previous quarter (October-December 2021).

Overall, personal insolvency numbers (bankruptcies and protected trust deeds) in Scotland for Q4 2021-2022 were 13% higher compared with Q4 2020-2021, at 1,894 (2021-2022) against 1,677 (2020-2021).

However, the number of personal insolvencies (bankruptcies and protected trust deeds) in Scotland fell by 8.3% in Q4 2021-2022 (January-March 2022) compared with the previous quarter (October-December 2021).

Richard Bathgate, chair of insolvency and restructuring trade body R3 in Scotland and restructuring partner at Johnston Carmichael, said: “There has been a sharp rise in corporate insolvencies over the last financial year, with 854 corporate insolvencies in the financial year 2021-22 compared to 442 corporate insolvencies in the financial year 2020-21. This has been driven by a 160% increase in the number of Creditors’ Voluntary Liquidations (CVLs) (270 in 2020-21 compared to 701 in 2021-22).

“It is interesting to note that in the financial year 2021-22, compulsory liquidations actually decreased by 11% compared to 2020-21 (there were 153 compulsory liquidations in 2021-22 compared to 172 in 2020-21). This suggests directors are preferring to use the CVL procedure over the compulsory liquidation procedure, perhaps because of lower costs to enter the process.

“In the latest quarter, Q4 2021-22, this trend of a sharp rise in the number of CVLs is even more pronounced, with an increase of 257% in the number of CVLs compared to Q4 2020-21 (in Q4 2020-21 there were 56 CVLs and in Q4 2021-22 there were 200).

“Members’ voluntary liquidations (MVLs), which are solvent liquidations often used to make tax efficient returns of capital to shareholders, declined by 18% in the financial year 2021-22 compared to 2020-21 (879 compared to 717) and this trend was even more pronounced in Q4 2021-22 compared to Q4 2020-21, which saw a 40% decrease in the number of MVLs.

“There has been a sharp rise in corporate insolvencies in the financial year 2021-22, particularly driven by directors placing companies into insolvency using the CVL procedure. The timing of this increase in corporate insolvencies coincides with many businesses needing to commence repayments on Bounce Back Loans from May 2021, notwithstanding that there are options available for companies struggling to make Bounce Back Loan repayments, including the Pay As You Grow scheme.”

He added that as we emerge from the pandemic, business owners are “taking stock of the financial position of their companies” and considering whether debt they have taken on to survive the pandemic is sustainable.

He continued: ” I would urge any director concerned about Bounce Back Loan repayments to talk to their lender in the first instance to understand what further support may be available.

“Businesses are being hit from every angle with creditor pressure increasing, inflation causing a rise in costs of raw materials, fuel and wages, whilst at the same time consumer demand is down because of the increased cost of living.

“Q4 2021-22 also spanned the most recent period of restrictions due to the Omicron variant. These restrictions included physical distancing and table service in hospitality settings, as well as impacting nightclubs and placing capacity limitations on indoor events.

“As a result, many businesses missed out on a vital cash injection from trading at their busiest time of year during the festive period. As we head into spring, this has meant some directors may be considering the debt in their business unsustainable and are using corporate insolvency and specifically CVLs to restructure their business and alleviate financial distress.”

Mr Bathgate added that it has also not been an easy period for individuals. He highlighted that total personal insolvencies increased by 2% in the financial year 2021-22 compared to 2020-21 (7,594 compared to 7,765) but more recently this trend has accelerated with an increase in personal insolvencies of 12.9% in Q4 2021-22 compared to Q4 2020-21.

He continued: “A 12.9% increase in personal insolvencies in Q4 2021-22 compared to Q4 2020-21 reveals a small decline in bankruptcies in that period (a decline of 2%) but a 21% increase in the number of Protected Trust Deeds. This likely reflects the emergency legislation put in place during the pandemic, which increased certain debt thresholds for bankruptcies which made entry to that process more difficult.

“It’s been an arduous two years for many people and their personal finances but we are now emerging from that period. However, while the pandemic was an opportunity for some to save money, others have had no choice but to borrow to make ends meet.

“At the same time, the increased cost of living is something we are already feeling the impact of, and unfortunately, it’s showing no sign of slowing down.

“Unemployment levels have fallen slightly in the last quarter, but an increase in the cost of living across the board and wages struggling to keep up with inflation has meant money worries are prevalent for people in Scotland.

“Rising energy, food and fuel prices are key concerns for Scottish consumers. In particular, higher rates of inflation for essential products are problematic for lower income households because the extra costs can’t be avoided. With budgets already stretched, we may see more and more people turning to credit options, even just to cover their priority bills.”

Mr Bathgate concluded: “Our advice for anyone worried about their finances – business owner or individual – is not to struggle on alone. Taking early advice about your money worries is hard, but discussing your concerns with a qualified, professional advisor as early as possible will give you more time to make considered decisions to resolve the challenges you might be facing, and the earlier you seek help the more options that might be available to you.”