Government statistics show that the number of insolvencies in Q3 2021 are showing a significant increase on the same period 2020 and the year so far. This might initially cause some surprise - why are businesses failing when we're (hopefully) past the worst on Covid? Unfortunately, it is to be expected.

If you consider a business that would have failed in 2020 anyway, what has the impact of the pandemic been for them? They have been able to save payroll costs through furlough, potentially had access to grants and cheap loans, and may even have been able to avoid paying rent. They have been placed on a lifeline - but once that support dries up, if there isn't a feasible business at the core then winding up is still inevitable.

The same applies to companies which have been made unfeasible by Covid. Unfortunately, the same will also apply to some companies which do still have a good trade underneath them - propped up by easy cash during the pandemic, they may have overextended themselves, and as support dries up and inflation rises find themselves unable to continue trading.

A business entering insolvency proceedings doesn't necessarily mean a winding up, however. Generally, when people hear that a high street name has gone into administration or liquidation, they assume that's it - the business has gone bust, and won't be coming back. But there is an important distinction between the two processes - and one that explains why certain high street stores seem to keep coming back!

Liquidation - or winding up - is the end of the road for a company. The liquidators will sell off the assets for the best price they can, and use them to settle creditors in a prescribed order. Any cash left over will be paid out to the shareholders. If a company needs to be liquidated because it cannot pay its debts (creditors' voluntary liquidation or compulsory liquidation) it is unlikely that there will be any money left for the shareholders, but a members' voluntary liquidation is a tried and tested method of extracting funds efficiently from a business when it comes to the end of its life.

Administration, on the other hand, is more like life support for a company. The shareholders pass over control of the business to a administrator. These are licenced insolvency practitioners, who are required to act impartially in the best interests of all stakeholders. Typically, they might negotiate to pay all creditors only a percentage of debts to allow the company to keep trading, or identify assets which could be sold without impairing the company's ability to trade. In a worst case scenario, they will wind up the company - but otherwise, once the administration has ended, control of the company returns to the shareholders. 

So, while its not surprising that the number of insolvencies is rising in 2021, and making the news, we can hope that businesses with a solid trade will only be entering a temporary administration, and will be back to productive growth for 2022.