DOWN AND OUT? UK insolvencies reach highest level in 14 years. AUTHOR – Sean Feast FCICM Brave | Curious | Resilient / www.cicm.com / <strong>September</strong> <strong>2023</strong> / PAGE 26
INSOLVENCY “Business owners remain worried about customer demand, rising costs and the state of the economy, while high interest rates may affect access to rescue funding and could deprive savable firms of a lifeline.’’ THE number of registered company insolvencies jumped 13 percent in Q2 <strong>2023</strong> compared to Q2 2022, and reached the highest level since Q2 2009, according to figures released at the end of July. Q2 <strong>2023</strong> figures are also nine percent higher than in Q1. However, the number of insolvencies is expected to fall towards the end of <strong>2023</strong>, according to restructuring advisers at RSM UK. The figures show between 1 April and 30 June <strong>2023</strong>, there were 6,342 company insolvencies, made up of 5,240 creditors’ voluntary liquidations (CVLs), 637 compulsory liquidations, 409 administrations and 56 company voluntary arrangements (CVAs). CVLs are at their highest since the time series began in 1960. Brendan Clarkson, Director of PKF GM, says that although the numbers of CVLs have increased, accounting for 83 percent of all company insolvency in the quarter, there are currently materially fewer failures occurring in medium to large companies than was the case before the pandemic: “Redundancies nationally also remain at very low levels. British companies and the economy in general are exhibiting much more resilience than many were predicting last year. It remains to be seen whether this can continue, given increased borrowing and energy costs,” he says. Lindsey Cooper, partner at RSM UK Restructuring Advisory, believes the large rise in total insolvencies is not surprising: “Some 83 percent of them relate to small businesses entering into a liquidation process where directors of these companies have decided that they have exhausted all recovery options and have no alternative but to cease trading,” she explains. “Many of these businesses have high levels of debt on their balance sheets and little or no reserves. They have managed to hold on up until now with the help of the COVID support measures. “With the rise in interest rates and hikes in inflation, businesses that previously benefitted from cheap loans and ran on very small margins are now facing significant challenges especially when it comes to renewing bank facilities or refinancing. We expect the number of liquidations to continue to increase in the short term.” Lindsey says that the cost of finance is also impacting larger businesses and there is a steep rise in CVA and administration numbers in the quarter: “The number of administrations has increased by 95 (30 percent) over the last quarter and the number of CVAs by 18 (47 percent). We expect this trend to continue as businesses make use of these corporate rescue procedures, including the new restructuring plan process, to restructure their balance sheets. “There is some good news that inflation is falling, however, whilst goods inflation is falling fast which is positive for manufacturers and construction, wage inflation is stickier, so it is likely that services industries where labour is a major cost, will find conditions more challenging.” Sustained pressures Samantha Keen, UK Turnaround and Restructuring Strategy Partner at EY- Parthenon, agrees that many businesses are struggling to contend with a sustained mix of pressures: “The current lowgrowth, high-inflation and relatively high interest rate environment has meant many businesses have faced building pressure over the last 12 months which is now translating into distress,” she says. The increasing cost of refinancing options available to companies in this higher interest rate environment are now having a direct impact on profitability. According to EY-Parthenon’s latest Profit Warnings report found that nearly one-infive UK-listed companies issued a profit warning in the last 12 months, with 20 percent citing tighter credit conditions – the highest level since 2008. “As we’ve seen with previous economic downturns, an increase in restructuring activity traditionally comes after a peak in profit warnings with many businesses looking to implement restructuring plans as a rescue solution rather than insolvency,” she continues. “In Q2 there was a 34 percent year-on-year rise in Administrations and there’s likely to be a further uplift in restructuring in H2 <strong>2023</strong> as businesses look at options to safeguard their long-term survival. “The tighter lending environment will have an ongoing impact on profitability so it’s imperative that businesses continue to build solid operational and financial foundations as well as conduct robust forecasting to ensure they are fully equipped to adapt to changing conditions in their market.” Nicky Fisher, President of R3, the UK’s insolvency and restructuring trade body, also agrees that more and more businesses are running out of road or rope: “Directors are choosing to close down their firms while the decision is still theirs, while an increasing number of creditors – including HMRC – are turning to winding-up petitions to recover the debts they’re owed,” she says. “When the pandemic ended, many directors thought and hoped things would improve, but instead they’ve faced rising costs, supply chain issues and a customer base that is tightening its purse strings to cope with the cost of living. “Business owners remain worried about customer demand, rising costs and the state of the economy, while high interest rates may affect access to rescue funding and could deprive savable firms of a lifeline. Unless the economic picture improves, it’s likely more businesses will need an insolvency process to help resolve their financial issues, and numbers will remain high throughout the rest of this year. Gary Brown MCICM, founder of Debt Register, thinks the uptick in insolvencies is easily explained: “The pandemic indeed brought about unique circumstances that led to an influx of new businesses. Many individuals were left jobless or with more time on their hands due to furloughs and the disruption of regular work routines. In response, some people ventured into Brave | Curious | Resilient / www.cicm.com / <strong>September</strong> <strong>2023</strong> / PAGE 27 continues on page 28 >
Change language