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Business insolvencies hit 10-year high

At the end of April came news that many people have been expecting for some time – business insolvencies had risen in the first quarter of 2022. What may not have been expected is that the number of insolvencies had risen to a 10-year high. Official data from the government reported that a total of 4896 companies became insolvent in the first quarter of this year – up from 4615 in the last quarter of 2021 and double that of the same period a year earlier.

The storm has been expected for some time as the government’s financial and legislative support to combat Covid came to an end. Insolvencies were artificially kept down during the pandemic as around 1.7 million firms were given life support to the tune of £80bn in government-backed loans and grants alongside formal bans on evictions from commercial premises, debt recovery proceedings and compulsory liquidations.

The problem has been exacerbated by the proliferation of what are termed ‘zombie companies’ – a firm that can service its loan and debt repayments but is unable to repay the principal without further forms of funding – from shareholders, for example. So, while such companies appear to be making good sales, drawing in revenue and generating a profit, there’s little else left to deal with capital owed after interest repayments.

Zombie companies are nothing new, but Covid created more of them and worsened the position of those that entered the pandemic in a parlous state as they took on more debt just to keep going.

Financial services experts Hargreaves Lansdown noted the problem in a comment on its website in May 2021. It detailed how the number of zombie companies in the FTSE 350 sat in a range of 30-40 between 2012 and 2019, but in 2020 that number rose markedly to around 75.

While a zombie company can be turned around, the longer it stays in the zone the less cash it has to invest in its systems and growth, the less fat it can put on, and the more vulnerable it becomes to unpleasant surprises.

Of course, while the numbers aren’t great, it’s fair to put this high point in the data that we’re witnessing into context – that corporate failures are playing catchup against an artificially low level of insolvencies because formal stays of action from creditors have now ended. Worse for creditors, this level could be sustained for a few more quarters as firms face a reckoning at a time of rising inflation and constrained family budgets.

One crumb of comfort that can be drawn from the government’s data is that while voluntary company liquidations during the quarter were at the highest level since records began in 1960 – they made up 87% of all company insolvencies – the number of compulsory liquidations has risen too, but is lower than pre-pandemic levels.

In terms of personal insolvencies, the government’s data showed that they are rising too. Q1 2022 numbers were 14% higher compared with the same quarter of 2021 – 32,305 individual insolvencies. Some of this can be explained by a change in June 2021 to debt relief orders – a form of bankruptcy protection. They can now be used to write off personal debts of up to £30,000 compared to £20,000 previously.

So, what now? It’s perfectly clear that the government will not do anything to help firms that find themselves in trouble. This means careful marshalling of resources, control over costs, caution, and where sales are made on credit terms, ensuring that customers are correctly credit controlled.

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