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Corporate insolvencies soar to highest level in three years

Author: ICAEW Insights

Published: 02 May 2023

High borrowing costs and inflation are weighing heavily on businesses, official figures suggest.

Company insolvencies rose 16% in March compared to the previous year as business owners struggled to contend with soaring costs and tougher economic conditions. Experts predict that more will follow, as the economy continues to stagnate.

Last month there were 2,457 insolvent companies compared to 2,120 in March 2022, according to official figures. When considered against March’s 2021 total of 999, corporate insolvencies rose by 145.9%, highlighting how government pandemic support measures kept thousands of businesses afloat.

Companies are facing the highest borrowing costs since 2008 after the Bank of England raised interest rates to 4.25%. Stubbornly high inflation is also weighing heavily on the economy, which is forecast to enter recession at some point this year. The rise in the latest figures was driven mostly by 2,011 Creditors’ Voluntary Liquidations (CVLs), 9% higher than in March 2022.

Nick O’Reilly, Director of Restructuring and Recovery at MHA, the 13th largest accountancy group in the UK, expects insolvencies to continue to rise this year as businesses face ongoing challenges and little government support: “After recent warnings, UK business administrations have now risen to pre-pandemic levels. As businesses continue to face a perfect storm of high energy bills, increasing interest rates and detrimental inflation, alongside little to no government support, we should expect administrations to continue to rise in the months ahead,” he says.

Philip King, Tide’s cash flow expert and a former Small Business Commissioner, also suggests that the UK is on the cusp of a greater flow of insolvencies: “Small businesses have become increasingly fatigued after facing a plethora of economic issues, including rising energy prices and inflation,” he says. “We will see further increases in business insolvencies in the coming months. Businesses with high energy usage or that rely on consumers’ discretionary spending are particularly at risk. Many small business owners are deciding to throw in the towel and walk away.” 

As more companies close and redundancies rise, O’Reilly says this could affect business confidence, which has been showing signs of a rebound. “Given how underwhelming the chancellor’s spring budget was in terms of business support, we have to conclude that high insolvency numbers are acceptable for the government that wants to clear out the zombie companies and allow the fittest to survive.”

There were 288 compulsory liquidations in March 2023, more than twice the number in March 2022. Numbers of compulsory liquidations have increased from historical lows seen during the coronavirus pandemic, partly as a result of an increase in winding-up petitions presented by HMRC. Administrations and Company Voluntary Arrangements (CVAs) were also higher than the same period last year.

The end of zombie companies

During the pandemic, insolvency figures were at an historical low for an economic crisis – due to government support measures such as furlough and the Bounce Back Loan Scheme. The current rebound in insolvencies indicates that the support measures masked the real corporate insolvency environment, and there is the suggestion that many so-called zombie companies were being kept afloat artificially.

Nick Parsk, Insolvency Partner at Oury Clark, says: “The figures don’t surprise most of us who work in the insolvency profession. During the pandemic, the government introduced legislation that made it virtually impossible for creditors to wind up businesses and, therefore, the threat of any enforcement action was lost. As a result, a number of businesses that would have naturally gone into insolvent liquidations have sat around fairly dormant until April of last year, when the system was unlocked.” 

Christina Fitzgerald, President of R3, the insolvency and restructuring trade body, said: “Business owners have spent three years trading through a pandemic and economic uncertainty, and an increasing number are choosing to shut their businesses before that choice is taken away from them and as the turbulent trading climate proves too much.”

A boost for insolvency practitioners

Richard Curtin, Restructuring and Insolvencies Partner at law firm Spector Constant & Williams, says the latest figures marked the start of a busy time for the insolvency profession: “There have been many false dawns, but insolvency practitioners are certainly busier than they were before Christmas. Next month’s figures will be interesting to see, as administrations are back to pre-pandemic levels.”

Parsk says he expects the number of administration appointments to rise as business owners look at recovery options and lenders take more enforcement action. Pre-pack administrations may also be a popular option for companies, he says: “The numbers for CVAs are low, which is no surprise given the change in HMRC’s status as a creditor. Business owners tend to favour a pre-pack administration as a way of trying to buy their business back free from debt. It is likely that we will see the numbers of pre-pack administrations rise significantly over the next two years.”

Insolvency firms look set to face greater competition for staff as demand for their services ramps up. “Skilled insolvency professionals can demand high wages, and this leads to a lot of movement in the market as firms compete to get the best people. The pandemic and the recent rate of high-profile insolvencies has meant that insolvency as a career is out of the shadows, and more graduates and school leavers are giving it consideration for their working futures, which is a positive for the profession,” Parsk says.

However, Miles Hacking, Insolvency Director at law firm Freeths, said concern about a lack of regulated insolvency practitioners to properly investigate and realise the assets of these insolvencies for the benefit of the insolvent estates was an age-old problem. Hacking says the Insolvency Exams have “notoriously low pass rates and with around 1,700 licenced insolvency practitioners in the UK (not all of whom will take appointments)” it is not a problem that can be resolved overnight. 

ICAEW’s Virtual Restructuring and Insolvency Conference 2023 will take place on 27 and 28 June. Find out more and book now to claim your early bird discount.

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