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Companies face ‘tipping point’ as insolvencies remain high

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Insolvencies across England and Wales in May remained “much higher” than levels seen during the pandemic, with businesses facing “considerable challenges” despite some renewed optimism.

18th Jun 2024
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While the rate of company insolvencies in England and Wales slowed last month, the total amount still remained high with business owners now finding themselves at a “critical tipping point”.

According to new data from the Insolvency Service, the number of registered company insolvencies in May was 2,006, which was 6% lower than in April 2024 and 21% lower than the same month in the previous year.

Insolvencies much higher

However, insolvencies remained “much higher” than levels seen during both the Covid-19 pandemic and between 2014-2019.

In May, there were 271 compulsory liquidations, 1,590 creditors’ voluntary liquidations (CVLs), 126 administrations and 19 company voluntary arrangements (CVAs).

The amount of CVLs and administrations was lower than in both May 2023 and April 2024, while the number of compulsory liquidations was lower than in May 2023, but higher than in April 2024.

One in 180 businesses on the Companies House effective register entered insolvency between 1 June 2023 and 31 May 2024.

Meanwhile, the five industries that experienced the highest number of insolvencies in the 12 months to April 2024 were:

  • Construction (4,401, 18% of cases with industry captured);
  • Wholesale and retail trade; repair of motor vehicles and motorcycles (3,906, 16% of cases);
  • Accommodation and food service activities (3,821, 15% of cases);
  • Administrative and support service activities (2,402, 10% of cases);
  • Professional, scientific and technical activities (2,026, 8% of cases).

Critical tipping point

Nicola Clark, restructuring partner at accountancy and advisory firm Azets, believes owners now find themselves “at a critical tipping point, as the rate of growth in company administrations slows”, adding that the numbers suggest a “window of opportunity for more companies to be rescued, provided they engage in the restructuring process early”.

“However, the rise in liquidations remains alarming,” she said.

“As inflation continues to ease and in anticipation of a potential interest rate cut by the Bank of England, business owners are likely feeling more optimistic than they have done for a long time.

“Analysing insolvency statistics now requires a deeper examination of trends than we have needed to since the pandemic began. Factors such as inflation, energy prices and spiralling business costs have been significant contributors to business failures over the past four years.”

Clark added that despite the renewed optimism, businesses “still face considerable challenges”.

“The cost-of-living crisis is likely to curb consumer spending for some time.

“Yet, there is some short-term relief at least for those more vulnerable sectors such as hospitality and leisure, with warmer weather and a summer filled with major sporting events including Euro 2024 and the Olympics providing a much needed-boost to incomes, after a tough Christmas trading period and poor weather so far this year.”

Need for planning reform

Kelly Boorman, national head of construction at RSM UK, believes the industry experiencing the largest number of insolvencies highlights the need for planning reform from the next government.

“Funding is still tight for construction businesses, especially as interest rates haven’t come down as quickly as needed, which alongside rising labour costs, means margins are smaller than ever.

“With pipelines continuing to grow, there’s an increasing tension from managing lack of access to working capital to deliver projects and the time taken to mobilise, both key contributors to the number of construction insolvencies.”

With the geopolitical landscape “adding uncertainty” and payment terms are “stretching the supply chain”, as well as access to labour “expected to worsen in the summer months”, Boorman expects a “ramp up in construction insolvencies in Q3 2024, as businesses will be unable to deliver on protects from a financial and labour perspective”.

“The next government must therefore prioritise de-risking the supply chain, reducing payment terms, and provide clarity on infrastructure planning and spend, enabling businesses to make more informed and long-term growth decisions when bidding for projects.”

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By FactChecker
18th Jun 2024 22:59

Right, let's toss a grenade into this plethora of meaningless statistics ... and where better to start than: "the industry that experienced the highest number of insolvencies in the 12 months to April 2024 was - Construction (4,401)".

Obviously that headline number will encompass large, medium, small and OMB businesses - but we're not given the breakdown of them (with reference say to - years in business - t/o last 3 years - core activity).

I'm therefore guessing (albeit based on an unofficial sample of 50+ 'construction sector' firms), but suspect that a sizeable proportion of the 4,401 are the regulars whose m.o. has revolved around insolvency (typically every 3-5 years) and the rotation of family as directors.
Next, a category with whom I have more sympathy, those who have a single & singular specialism that is suddenly out of favour - such as 'engineers' who followed the governmental lure of grants for their customers, before discovering that govts aren't trustworthy & clients can be fickle.
Least observable are those always quoted in the news (as suffering due to the rapid increase in costs of materials) ... not because those costs haven't in some cases doubled in 2 years, but because that hasn't markedly impacted on demand for their services.

So ... if the statistics being trotted out here are doing little to illuminate what's actually happening in the construction sector, then what about the other highlighted sectors?

It's noticeable that several figured highly as sectors that attracted entrepreneurs (aka gamblers) just before and during the pandemic, so probably not all of them had established a sound business foundation ... a fact which then got obscured by SEISS and BBLS etc, resulting in delays to but not cures for financial meltdown.

There *are* some interesting stories out there in this sphere (and ones which politicians of any hue should take note of), but that would require more research than is presumably available at Aweb.

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By DJKL
19th Jun 2024 12:38

A perceived boom in construction sector is within the legal sector serving same, contract disputes with larger contractors/sub contractors endeavouring to amend/tear up contracts as they have been caught by price movements ripples through the sector.

I chat quite often with the son of one of my employers who builds houses/flats etc, the sector appears to be very volatile. (The most important staff member these days seems to be the in house QS interpreting the contracts/ quantities/ pricing/ applications)

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By FactChecker
19th Jun 2024 13:49

My (convoluted) point was more to do with the lack of illumination provided by these regular 'updates' on Insolvencies, as they froth with statistics but provide very little in the way of useful facts.

Focussing on the parts related to the Construction sector was just me being opportunistic as it's an area with which I have some personal experience ... but I happily bow to your far superior and regular knowledge.

FWIW I certainly agree with the point about using a QS ... in terms of VFM on large (and more importantly) lengthy projects, my experience was that planners (whether architects or project managers) were of dubious value; however, as well as the obviously essential structural engineers, it was the QS who gave me the control I needed - so long as their role was written into the original Contract.

To be fair, most construction firms have been historically happy to assume that changes in material costs would be immaterial (the pun had to be there) in terms of the scale of their profits ... their focus being more on preventing 'scope creep' (which they dread as much as 'indecisive clients').
So the introduction of a new factor has indeed been a major shock to most of them - although not as big as for those I've used after hearing my explanation that the Q in QS was just as much about measuring Quality as Quantity.
The look of horror on their faces!

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paddle steamer
By DJKL
19th Jun 2024 16:08

The catch is the volatility in pricing is swinging reasonably priced and mainly agreed contracts (never really seen a genuine fixed price building contract, there is always prelim adjustments)into losses.

The bleat is if you will not relent we will go bust, but we can step away in a controlled manner if you just give us £***,*** for the balance of what has been completed to date. This approach means they have their QS, you have yours, lots of construction lawyers on both sides and eventually, with your funding running out re time etc, you get forced to settle to try to keep the show on the road.

The above individual I chat with is now trying to stop using main contractors on his sites and is instead operating on site ,project managing himself (He is a civil engineer and RICS) directing various sub contractors individually. Lot more work, but not having a main contractor trying to "blackmail" you is only way to go and if costs really escalate you just down tools and cap the site works rather than being embroiled in a contract for say 10-15 units. (Not so easy on blocks of flats where lot of cash stuck in a part built, but houses now being built only to order)

There have been a few housebuilders looking ropey, I took a punt on Springfield (Scottish listed) and made a little as they seemed to be selling landbank/reducing debt and market price recovered, but am sure there are a fair few main contractors with employees who are struggling to get work that will pay the permanent workforce so would not be surprised if some larger non listed came a cropper.

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