CM December 2023

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INSOLVENCY Downward Spiral Are the latest insolvency figures the start of a Tsumani or a wet weekend? AUTHOR – Les Clisby THE number of registered company insolvencies in Q3 2023 fell two percent on the previous quarter, according to figures released in November, and some expect that number to continue falling towards the end of 2023. The figures show between 1 July and 30 September 2023, there were 6,208 company insolvencies, made up of 4,965 creditors’ voluntary liquidations (CVLs), 735 compulsory liquidations, 466 administrations, 41 company voluntary arrangements (CVAs) and one receivership appointment. The number of insolvencies in Q3 2023 was 10 percent higher than Q3 2022. Gareth Harris, partner at RSM UK Restructuring Advisory, expresses little surprise or alarm: “A small drop in insolvencies is a step in the right direction, with the majority of the fall from lower levels of ‘shut down’ creditors’ voluntary liquidations at the smaller end where the catch-up from COVID and Government support has been flushed out,” he explains. “Sticky inflation, high interest rates and the cost of living are still making it tough for businesses to recover post-COVID, but we are entering a new phase, as business confidence recovers, we are already seeing an increase in corporate rescues and businesses bought from administration. High debt levels are really starting to bite but there is increased appetite to invest and save those businesses that ought to have a future.” Gareth says that the flip side of this is that whilst creditors have been supportive of businesses as they recover post-pandemic, this patience has now run out: “The stance on forbearance has hardened, leading to an increase in compulsory liquidations, which points to the need to engage with all stakeholders to find a solution. Whilst this is a small fall in overall insolvency numbers, we expect insolvencies to return to more normal long-term levels over the next few years.” A perfect storm Christina Fitzgerald, Immediate Past President of R3, the UK’s insolvency and restructuring trade body, is perhaps a little more concerned: “A perfect storm of economic issues has led to the highest Q3 ‘‘The earlier you begin dealing with any issues, the more options you will have available and more time to make decisions while concerns are new, rather than when they have spiralled.” corporate insolvency figures in more than two decades,” she says. “A combination of rising costs, director fatigue and increased creditor pressure mean more firms are turning to a corporate insolvency process to resolve their financial issues. “The key driver of the numbers is the rise in CVLs, which have reached their second highest figure on record and the highest number ever recorded in Q3. After years of battling through the pandemic, supply chain issues, increasing costs, rising inflation and requests for higher wages, many directors have simply had enough and are calling it a day while that choice is still theirs. “Compulsory liquidation numbers have reached a four year high – partly because of legislation preventing them and then making the winding-up petition threshold higher in the aftermath of the pandemic, but also because these firms are now under their own pressures, and are calling in debts in the hope of balancing their own books. “Trading conditions are tough right now. People are worried about money and reluctant to spend on anything other than the basics – and even then, are looking for the best deal possible – while costs are rising and the economy remains turbulent.” Christina believes that the Christmas period could be make or break for many, especially those in retail and hospitality: “It remains to be seen whether this year’s Christmas trading period will be the shot in the arm or the final blow for those that are struggling, and we may see a surge in insolvencies in the New Year if it’s the latter.” Jonathan Andrew, Global CEO of Bibby Financial Services, also believes that the combination of high interest rates, inflation and market uncertainty is undoubtedly beginning to bite: “The cost-of-doingbusiness crisis is a very real threat to the UK’s economic recovery and, in particular, the UK’s SME community,” he says. “The construction, hospitality and retail sectors have been the first to feel the pinch, but the full picture of SMEs’ viability will become clearer after Christmas. By then, we could be staring down the barrel of a gun for insolvencies. Without further support from both the private and public sectors, it’s possible we could see insolvencies exceed the last financial crisis." Brave | Curious | Resilient / www.cicm.com / December 2023 / PAGE 40
“It remains to be seen whether this year’s Christmas trading period will be the shot in the arm or the final blow for those that are struggling, and we may see a surge in insolvencies in the New Year if it’s the latter.” – Gareth Harris, RSM UK Devastating impact Brendan Clarkson FCICM, Business Advisory Director at restructuring and insolvency firm, PKF GM, says that insufficient help from the Government and continued inflation have had devastating impacts on businesses’ bottom lines. He says that business owners who think they may be struggling should reach out for support as soon as possible. “The evidential Tsunami of insolvencies is now becoming a reality,” he says, “and there is no doubt that continued high inflation coupled with a lack of support from the Government since its own bailout post-COVID has led us to where we are. “The unfortunate fact is that businesses are being hit from a variety of angles – and all these blows have an effect on bottom lines. Firms are operating in a climate where consumers are reducing their spending on non-essential items, while at the same time, the costs of operating a business remain high. Inflation has been a problem for some time, and while this is expected to ease, it is still sitting higher than many have predicted. “Our message to company directors is straightforward: if you are at all worried about your business, seek advice. It is a difficult conversation to have, let alone to start, but the earlier you begin dealing with any issues, the more options you will have available and more time to make decisions while concerns are new, rather than when they have spiralled.” Simon Edel, UK Turnaround and Restructuring Strategy Partner at EY- Parthenon, is similarly concerned that company insolvencies in Q2 and Q3 2023 reached their highest level since Q2 2009, whilst administrations saw a 58 percent year-on-year uplift. “Since the pandemic, insolvency activity had been heavily focused among smaller companies, but we are now seeing increased activity in the mid-market as macro-economic and financing stresses build. “These mid-market companies – whose balance sheets had previously been cushioned by extended maturities and COVID support measures – are now facing several liabilities, including the repayment of pandemic loans, higher refinancing hurdles and ongoing, supply, cost and interest rate pressures. “This stress is manifesting in rising profit warnings and mid-market administration appointments.” Profit warnings EY-Parthenon’s latest Profit Warning report for Q3 found that a third (33 percent) of profit warnings during the quarter came from mid-market listed companies – the highest proportion of warnings from this group in almost thirteen years. “The rise in corporate-led restructuring activity is also significant among ‘large cap’ companies, where the focus is still largely on refinancing and liability planning. “It is critical that companies adapt their financial and operating structures to fundamental changes in their market and the rising cost of capital by contingency planning and seeking board advice – delaying action risks affecting value.” Brave | Curious | Resilient / www.cicm.com / December 2023 / PAGE 41
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CM December 2023

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