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Insolvencies rising as cost of doing business bites

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Despite last month’s short respite, the cost of doing business is forcing insolvencies to rise in every sector.

20th Jun 2022
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As the cost of living continues to bite, the cost of doing business is continuing to hit every sector. Statistics from the Insolvency Service for May 2022 show that despite the short respite we saw in the stats for April, insolvencies are on the rise once again and are 66% higher than those recorded for the month of May during the first pandemic year in 2019.

According to the Insolvency Service there were 1,817 company insolvencies recorded for May 2022. Of those, 1,584 were Creditors’ Voluntary Liquidations (1,584). This was a drop of 8.9% compared to the number recorded for April 2022 at 1,777

Higher than 2021

Despite the fall, the figures for May 2022 are still 79% higher than in the same month in the previous year where the number of registered company insolvencies stood at 1,014.

There were also 135 compulsory liquidations, which is 297% (four times) higher than May 2021, but 50% lower (half the number) than May 2019, and 84 administrations, which is 95% higher than May 2021 indicating that a rescue culture does seem to be growing.

“The monthly fall in corporate insolvencies has mainly been driven by a reduction in creditors’ voluntary liquidations. However, numbers for this process and for overall corporate insolvencies are higher than this time last year, the year before it (2020) and in 2019,” said Christina Fitzgerald, president of R3, the insolvency and restructuring trade body.

“Many companies are still reeling from recent factors,” said John Bell, senior partner, Clarke Bell Insolvency Practitioners.   

“The pandemic has had a significant effect, compounded by the economic uncertainty caused by Brexit, along with other current events. Due to the heavy impact and persistence of these problems, it’s no surprise that many directors of struggling companies are facing compulsory liquidation.”

But with firms being buffeted by rising costs, falling consumer confidence and reluctance to spend on anything other than the essentials, businesses have not made the additional income they need to offset increased expenditure.

“There simply hasn’t been time to draw breath between the issues caused by the pandemic and those now arising from our current economic challenges, and many businesses who have survived so far are now starting to struggle – and rising interest rates will add extra costs for firms to deal with,” commented Fitzgerald.

Optimism in UK economy is plummeting

Confidence is falling. According to the latest Hargreaves Lansdown Investor Confidence Survey, confidence in UK economic growth has fallen by 7% compared to last year.

“Given the cauldron of problems bubbling up, it’s little surprise that optimism in the UK economy is plummeting,” commented Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

“This weakness of the economy has led to fears that although inflation is running at a 40-year high and is increasingly hazardous, the Bank of England is still likely to shy away from hiking rates more sharply in fear of provoking the toxic reaction of a deep recession.’’

Insolvencies build in construction sector

On the sector front, insolvencies in the construction industry have been growing. Lack of profitability and cashflow issues are the main triggers for insolvency in construction companies. The sector is highly competitive, leading to the lowest price often winning the tender, which may in turn result in contractors performing work with minimal margins. 

“Since the start of the year, we have seen the large number of insolvencies in the construction sector. This is an industry that has been hit hardest by the pandemic – especially as the seasons during which it is at its busiest fell during times when lockdowns or restrictions were in place,” said Fitzgerald.

“Businesses both in and servicing the construction sector also usually operate on more sensitive profit margins which will have been affected by the rises in the cost of fuel and energy, as well as the supply chain issues at the end of last year and the start of this one.”

Ugly times ahead?

Companies are being hit with rises in interest rates and escalating energy costs are adding to raw material shortages and supply chain challenges, and many businesses are faced with raising their prices purely to keep their businesses afloat.

Overall, insolvency trends remain uneven. “The latest drop in insolvency figures demonstrates what a phoney war struggling businesses are experiencing,” said Nick Hood, senior business adviser, Opus Business Advisory Group. “Their problems are multiplying and deepening almost by the hour and yet they somehow struggle on. There is a reckoning coming soon. The autumn and winter could be ugly.”

Replies (5)

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paddle steamer
By DJKL
20th Jun 2022 15:56

Could some of this be the unlocking of the difficulties of pursuing commercial tenants for rent arrears, frankly with hands bound previously due to Covid re liefs we played along with laggards as there was nothing more productive to be done at the time, however that position has eased- effectively are some of the large numbers due to playing catch up?

https://www.gov.uk/government/news/new-laws-and-code-to-resolve-remainin...

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By philaccountant
22nd Jun 2022 09:48

Still don't understand the logic of raising interest rates to combat imported inflation due to huge energy price rises and brexit.

I know we like to think we punch above our weight, but I don't see the BoE removing spending power from people's pockets shifting the dial on the global gas market much.

Good for the banks though, with all the interest they'll be raking in...

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Replying to philaccountant:
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By JD
22nd Jun 2022 14:26

Presumably, that is just one part of the picture.

Along side imported inflation, we seem to have home grown inflation from all of the Covid-19 monies that have been thrown into the economy and wage inflation from a shortage of labour, with lots of people having used furlough to fund early retirement/not gone back to work - In short the BOE are now having to put right the uncontrolled response to Covid-19.

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Replying to philaccountant:
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By creamdelacream
22nd Jun 2022 14:46

Agree with both these comments but not that it has much to do with Brexit as many countries in the west have the exact same issue. https://ec.europa.eu/eurostat/documents/2995521/14636256/2-31052022-AP-E....

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Replying to creamdelacream:
paddle steamer
By DJKL
22nd Jun 2022 16:18

I think it is fair to say it is a blended mix of causation, Brexit likely accounts for some , how much, who knows.

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