It shouldn’t come as a surprise, given the state of the UK’s economy, that company insolvencies are rising.
Data published by the Insolvency Service at the end of October 2023 noted that insolvencies in England and Wales in the second and third quarters of 2023, were at their highest since the global financial crisis of 2009.
In numbers, of the 6208 registered company insolvencies between 1 July and 30 September 2023, 4965 were creditors’ voluntary liquidations, 735 compulsory liquidations (CVL), 466 administrations, 41 company voluntary arrangements (CVA), and one was a receivership appointment.
For the year-to-date, 4276 of the failures were in construction, 3777 were in wholesale and retail, including motor vehicles and motorcycles, 3477 were in accommodation and food service activities, 2282 were in administrative and support service activities, and ‘just’ 1911 were in manufacturing.
Insolvency is a devolved matter in Scotland with the Accountant in Bankruptcy handling matters there. Regardless, there were 296 company insolvencies, 7% up on the same quarter of 2022, made up of 107 compulsory liquidations, 174 CVLs and 15 administrations.
Meanwhile, Northern Ireland saw 62 company insolvencies in Q3 2023, a 24% increase from the same quarter of 2022. There were 30 compulsory liquidations, 23 CVLs, eight CVAs and one administration.
The reasons for the increases should be obvious but are worth outlining regardless. Summed up well by Mark Ford, a partner in restructuring and recovery services at Evelyn Partners, he said: “Company insolvencies have soared … against a grim backdrop of continuing cost increases, a harsh and uncertain macroeconomic environment and continuing friction in supply chains and trading conditions.”
Fundamentally, firms in consumer-led sectors – such as accommodation, food, wholesale and retail trade – have been hit by a triple whammy of weak demand, high energy costs and wages bills. On top of that, sterling is not at its strongest, making imports more expensive. A year ago, post-Truss, one pound bought $1.13. A change of prime minister and over the following months sterling rose to buy, at an August peak, $1.31. Now it’s sitting at around $1.22. And that drop is as a result of Forex traders seeing fewer, or no further, interest rate rises and better deals to be had with currencies elsewhere. That may be good for those with borrowing, but it hurts the cost of imports – including energy – and isn’t doing much for sales.
Indeed, separate data from the Office for National Statistics revealed that September’s retail sales were down 2.5% compared with February 2020 as a result of high inflation and borrowing costs.
Some firms reckon that certain sectors – especially those mentioned earlier – are vulnerable to rising debt and were hoping for a good Christmas, which would be make or break for them.
However, the cost of borrowing and a lack of access to working capital alongside weak consumer confidence and high inflation, means that insolvency practitioners are likely to see an upward trend in business over the next 12 months.
A corollary of this is the impact on zombie companies – firms that just about service their debt but neither grow nor pay their indebtedness off. For them, the writing is on the wall. And this means two things – they’ll fail, impacting creditors, and subsequently leaving more money to flow into investment and trade to those firms in better health.
None of this is a shock. But the worrying part is that any rise in insolvencies – irrespective of the business sector – tends to lead to a reduction in jobs potentially damaging output growth.