Simply put, insolvency happens when a business is not able to pay its debts. When a company is not able to locate funds to pay debts that are due, for example through taking on additional debt, it can legally file for bankruptcy. The company is then dissolved, and its assets are sold, usually by a third party such as a law firm, with the money received being divided between the company’s creditors. As a rule, creditors do not receive the full amount they are owed when a company files for bankruptcy. In most countries, a condition for filing for bankruptcy is that the company’s assets are not sufficient to cover the total amount of debt they owe. It is often the case that the outstanding debt is much higher than the value of the underlying assets.
Insolvencies across different countries
The differences in the level of insolvencies between countries result from various economic, institutional, and legal conditions. In 2023, France was the country expected to have the most business insolvencies worldwide, with nearly than 60,000 insolvencies that year. In China, the number of business insolvencies has grown dramatically in recent years, increasing almost fourfold since 2015 to reach 12,000 in 2022. While this increase is partially due to the growth of corporate debt in China over this period, it also reflects changes made to bankruptcy processes. In 2007, the Chinese bankruptcy code was overhauled, and specialized courts for bankruptcy proceedings were established between 2007 and 2017. Additionally, the economic impact of the COVID-19 pandemic further spurred the number of insolvencies.
COVID-19 and high inflation drives the number of insolvencies
Several businesses were hit hard by means implemented due to the outbreak of the coronavirus. For instance, insolvencies within retail trade in the United States reached a record in 2020, an the number of bankruptcies in Sweden reached a height immediately after the outbreak. On the other hand, many governments implemented unprecedented levels of financial support to businesses, which helped to mitigate the worst effects of the crisis.
The high inflation rates seen throughout the world in 2022 and 2023 have further added to the economic challenges of many companies as production costs soar and consumers are saving money. In Norway, more than half of the companies were struggling with higher purchasing prices in the first quarter of 2023. In the United Kingdom, the number of business insolvencies increased by 50 percent in 2022, underlining the impact of inflation that year.
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Einar H. Dyvik
Research expert covering Nordics and global data for society, economy, and politics