Strong Rise in Insolvencies Expected Among Smaller Companies and Sole ProprietorsResearch
Corporate Insolvencies in Times of COVID-19
Due to the suspended obligation to file for insolvency, the number of bankruptcies has fallen to a record low in 2020, despite poor business prospects. There is now a threat of a renewed rise in insolvencies in the coming months, mainly in the service and trade sectors. Smaller and older businesses as well as sole entrepreneurs will also record significantly more insolvencies again as the insolvency filing obligation is reinstated. These are the findings of a study conducted by ZEW Mannheim in cooperation with Creditreform, which examines the characteristics of insolvent companies and entrepreneurs before and after the COVID-19 crisis in Germany.
At the beginning of May 2021, the temporary suspension of the legal obligation for companies to file for insolvency expired. Using insolvency data from the Federal Statistical Office, the Association of German Chambers of Industry and Commerce, the Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection between 2006 and December 2020, ZEW researchers show that a strong increase in insolvencies can be expected in the coming months.
According to the study, the impact on the German economic sectors varies considerably: Especially in the four months after the start of the pandemic, a disproportionately strong decline in bankruptcies can be observed in the service and trade sector. “This backlog of corporate insolvencies largely affects companies in the service and trade sectors. Since the suspension of the obligation to file for insolvency, slightly rising insolvency figures have been observed across all sectors, but they are still at a low level,” says Dr. Georg Licht, head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and co-author of the study. The ZEW researchers expect that the number of corporate insolvencies in heavily affected sub-sectors such as the gastronomic sector, hotels, tourism and clothing will continue to rise in the coming months.
Legal form and employment as factors influencing insolvency
In addition, the researchers investigated whether the legal form of a company played a role in the decision to file for bankruptcy. They found that fully liable companies recorded a lower number of insolvency filings than those with limited liability. “Companies that are liable with their entire assets face far-reaching consequences. They have therefore made disproportionate use of the option to suspend insolvency. As soon as the obligation to file for insolvency is reintroduced, however, insolvencies of companies with this form of liability are likely to go up again,” says Georg Licht.
Analysing the correlation between corporate insolvency and employment, it becomes apparent that especially small companies with up to ten employees as well as self-employed persons and freelancers are vulnerable to the negative effects of the coronavirus crisis. “The number of bankrupt companies with a small number of employees decreased significantly until September 2020, while insolvency filings experienced an increase again at the end of the year. Insolvencies among this type of company are also expected to continue to increase in the coming months,” explains Georg Licht. Small companies in particular, with limited cash reserves and low collateral for drawing on new credit lines, are exposed to a high risk of insolvency.
Older entrepreneurs more strongly affected
The study also shows that since the pandemic, the number of insolvencies filed by older entrepreneurs over the age of 65 is catching up with the insolvency figures of younger entrepreneurs under the age of 35. The share of insolvencies by entrepreneurs living outside Germany is also rising. Since autumn 2020, a decline in insolvencies of sole proprietors has also been observed. In contrast to companies run by several people, sole-proprietor businesses are usually smaller. “The COVID-19 pandemic is hitting female and older entrepreneurs as well as sole proprietors harder. It is highly likely that, for example, sole proprietorships are part of the insolvency backlog, which is why insolvency filings by these entrepreneurs are also expected to increase in the coming months,” says ZEW researcher Licht, summarising the results of the study.