Insolvency and business recovery have an essential role to play in the successful functioning of UK plc post-pandemic, and even more so as the true extent of the financial and economic challenges facing business continue to unfold.

Government support measures including the furlough and Bounce Back Loan schemes are credited with minimising the business fallout from the pandemic, while also masking the scale of failing companies being artificially kept afloat. Their gradual withdrawal has seen corporate insolvencies rebound to almost pre-pandemic levels, rising at their fastest rate since 2012.

“All the temporary measures that we had in place to help companies have expired. But the recovery from the financial effects of COVID-19 is taking longer than expected in part due to other financial shocks,” says Paul Bannister, Head of Policy at the Insolvency Service.

The most recent economic indicators are doing little to suggest a reverse in the UK’s economic fortune. Growth is at its lowest level for 15 months and, with the consumer mood darker than at any time, business confidence is continuing to fall amid soaring inflation and a cost-of-living crisis. 

Following two years of declines, the latest Global Insolvency Report from Allianz says it expects global business insolvencies to rebound by +10% in 2022 and +14% in 2023, approaching their pre-pandemic level. In the UK, the withdrawal of state support is predicted to result in a sharp insolvency rebound in 2022, with Allianz predicting a 37% year-on-year rise to 22,305 cases. 

The insolvency profession is, on the face of it at least, poised to benefit from the growing need for business turnaround and insolvency expertise. However, the task facing IPs is daunting, as they face a rush of failures and call on their skills to identify those that can be restructured outside a formal procedure. The responsibility of saving jobs and business recovery in a difficult economic environment is not a task for the faint-hearted.

For situations where only a statutory process will provide a solution, IPs have a wide range of responsibilities imposed by the relevant legislation alongside an overriding duty in most jurisdictions to obtain the best possible outcome for the general body of creditors. 

IPs also have to navigate the requirements imposed by other legislation, such as AML, employment law, licensing requirements as well as additional responsibilities imposed by other regulators, such as the FCA and OFGEM, to name but two. Caroline Sumner, CEO of insolvency industry body R3, says: “Quite often the differing legislative requirements will conflict and that leads to additional costs and complexities. The additional burden is often underestimated.”

Meanwhile, the insolvency profession finds itself at a crossroads. The regulatory landscape is poised for upheaval as the government consultation on the future of insolvency regulation, launched in December last year, goes through the motions. Among the most contentious of proposals up for debate is the concept of a single state regulator for insolvency to replace the existing recognised professional bodies (RPBs), of which ICAEW is one.

Sumner says a strong regulatory framework is essential for the insolvency profession. However, she is concerned that there is insufficient evidence to support the extent of the current regulatory reform proposals. “While we agree that there are improvements that can be made, in particular around the speed of the disciplinary process, we are not convinced that the issues with the current framework warrant the overhaul proposed by the Government in its consultation.”

“Whether we like it or not, it’s very clear that there are parties for whom the current system isn’t working, and there is a lack of confidence in the current regime to be able to deliver what we need it to. Therefore, we have to look to deliver a constructive alternative,” Sumner adds. 

While R3’s members broadly welcome the idea of firm regulation for insolvency in addition to individual licensees, “the devil is in the detail”, Sumner says. “You have to make sure that you’re not just introducing an extra layer of cost and complexity. It’s going to be very difficult to work out how to make it work in practice.”

Nonetheless Sumner concedes that a good regulatory system needs to be able to identify where rules are being broken and by whom. “The current disciplinary system can be very slow and it can be very difficult to get the disciplinary outcomes that, from an outside point of view, you think should occur.”

Bannister, meanwhile, says the objective of reform is to ensure that everyone who comes into contact with the insolvency regime has confidence that it will treat them fairly and the outcomes are consistent. 

“At the moment, we have a fragmented regime that can sometimes bring in inconsistency of outcomes. We will also want to address the overall effectiveness of the regime including speed of outcomes and bringing in greater competition and diversity in the sector,” Bannister says.

At the same time, the profession faces significant recruitment challenges amid industry concerns about the attractiveness of the profession to new recruits. Perceptions of its attractiveness aside, the combination of too much work, too few resources and far too many ‘empty’ cases with insufficient realisable value to reward them adequately for their work, are creating a perfect storm.

Sumner is confident that messages about the value of business recovery and business rescue are trickling through to the SME level as a force for good. As economic uncertainty prevails, helping company directors better understand the process is key. “Key creditors like HMRC also need to become much more comfortable with taking an active role in voting on restructuring plans and rescue processes and taking a commercial view,” she says. 

Insolvency is a key part of a healthy economic system, Sumner adds, and we shouldn’t be afraid of businesses going bust. “If you’ve got a business where there is no future demand, then having an orderly wind down is a good thing.” 

Despite the huge changes afoot, Bannister thinks it’s largely business as usual for insolvency practitioners. “I don’t think the kind of cases that insolvency practitioners are taking will massively change; there will still be lots of small companies to deal with and individual bankruptcies. I think the larger insolvencies with some wider public interest aspects to them will continue, and the skills of the insolvency practitioner will be tested to deal with those difficult cases.”

But increasing complexity and uncertainty is inevitable, he believes. “There’ll be more shocks to come and things that we’ve not foreseen. And how we have to respond to those will make it quite a testing time. That’s just the nature of what we’ve seen over the last few years, nothing is simple anymore. Insolvency practitioners and other regulated professions will have to adapt to changing expectations by government and the public of our professional community.” 

In short, increasing scrutiny is here to stay. That’s just not going away.