If a company is unable to pay its debts, it is deemed insolvent. Whether it is due to a cash flow crisis or a loss of a business contract, data shows insolvencies are on the rise.
Why insolvencies are at an all-time high
Corporate insolvencies in England and Wales have reached their highest level in 30 years. According to the Insolvency Service, the total number of company insolvencies last year was 25,158, the highest number since 1993 and 14 per cent higher than in 2022.
And according to the Centre for Economics and Business Research, this is not set to improve in 2024, as it has forecast more than 8,000 insolvencies per quarter this year.
This all points to many businesses across the UK being on the brink.
Some sectors are more affected than others. According to Insolvency Service data from 2023, construction was the most affected sector, followed by wholesale, retail trade and the motor vehicle repair sector, with the accommodation and food service industries struggling too.
For the year ahead, I predict that those industries will continue to feel the pressure, with additional sectors including hotel, leisure and transport, and storage expected to suffer too.
Unsurprisingly, one factor behind these rising insolvencies is the continued impact of the pandemic. With government support measures in place during the pandemic in 2020 and 2021, insolvency numbers were low, as these loans were propping up businesses.
However, in 2022, as these measures were rolled back, the number of creditors’ voluntary liquidations increased to exceed pre-pandemic levels.
The Insolvency Service said one of the biggest drivers of these figures from 2022 was action by HMRC, which has increased the number of winding up orders for unpaid tax in recent months.
However, cost inflation is the major factor that drove record numbers of corporate insolvencies last year. In particular, we saw energy bills surging, and businesses are suffering through stagnation.
In a survey by PwC, 72 per cent of companies predicted negative repercussions on their profits due to rising energy costs.
For the manufacturing sector, which has been one of the more vulnerable industries for insolvencies, higher costs for electricity, gas or fuel for energy-intensive companies has brought huge pressure.
In addition to these factors, many sectors saw substantial increase in salaries, costs, materials and rising rent prices.
Tighter and more costly lending on finances is also adding salt to the wound for businesses, who are facing less access to capital and liquidity at a time when they need it most.
With reduced appetite for lending from high street banks, businesses are turning to secondary lenders who come with higher interest rates – often higher than these businesses can manage.
Whether you are a director, management, secured lender or even a landlord, it is important to know where you stand when an insolvency occurs and how best you can look after your own position.
Facing insolvency? Acknowledge it and act early
If your or your client's business is struggling, it can be tempting to bury one's head in the sand, but the key is getting advice early.
