Insolvencies are an important indicator of the health of an economy because they are a threat to jobs, banks must absorb any unpaid debts and the suppliers of the affected companies are also at risk. But when is a company insolvent? A company is insolvent when it is no longer (or unlikely to be) able to meet its payment obligations or its liabilities are not covered by its assets. Standard insolvency for companies unable to pay their liabilities takes three to six years and ends with the discharge of their residual debts. When a company becomes insolvent, it does not necessarily mean it will be liquidated; when a company applies for insolvency there is a chance it could be restructured. But if the company does have to be dissolved, then its assets are auctioned off and sold.
Numbers have risen since the end of Corona
In the past few years, the number of corporate insolvencies in Germany has been low, mainly due to the government’s Corona policies. At the start of the pandemic, the government no longer made companies file for insolvency; many companies also received substantial Coronavirus support payments. But these no longer apply. The result is that the number of standard insolvencies in March rose by 19.7 percent compared to the same period last year, according to preliminary figures from Germany’s Federal Statistical Office. And that is in line with the current trend. The figure rose by 13.2 percent compared to the previous month, after it had risen in February by 10.8 percent compared to January. According to the final figures for January, 1,271 companies filed for insolvency with district courts in Germany; companies in the construction and trade industries were hit particularly hard.
The renewed increase in the number of insolvencies is not only due to the Corona pandemic coming to an end. The high energy prices and rising interest rates, as well as subdued economic development in general, are having a considerable impact on companies.
The new normal for insolvencies
Experts are predicting that this is not a major wave of insolvencies, but a shift towards a new normal for insolvencies. Allianz Trade, the world leader in trade credit insurance, has revised its 2023 forecast for insolvencies in Germany upwards and now expects insolvencies to increase by 22 percent instead of 15 percent. At 17,800, the expected number of insolvencies for 2023 is still five percent lower than before the Corona pandemic. Even by the end of 2023, Germany is unlikely to have reached pre-pandemic levels. This is not expected to happen until 2024.