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Insolvencies up again as creditors start to bite

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Creditors look to be finally taking action over unpaid debt as the number of liquidations have risen to 131.4% higher than this time last year. 

15th Feb 2022
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The monthly insolvency stats released by the insolvency service today show that corporate insolvencies have increased in January 2022 to 1,560. 

This number is 131.4% higher than the 748 registered in January 2021. Insolvencies have naturally returned to pre-pandemic levels now the restrictions have been yanked from cash-strapped companies. 

Comparing today’s results to pre-pandemic January 2020 demonstrates this return to insolvency normality, where 1,508 company insolvencies were recorded. 

The increase in insolvencies was driven by creditors’ voluntary liquidations which at 1,358, were 34% higher than in January 2020. 

While the number of insolvencies were up, the insolvency service said that other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic.

“This suggests that creditors are now starting to take action over unpaid debt, having been legally prevented from doing so since the start of the pandemic,” commented R3’s Christina Fitzgerald, vice president at R3. 

Compare to December 2021

The 1,560 insolvencies in January is also slightly up on the 1,488 in December 2021, and continues the gradually upwards trajectory. December’s insolvency number was 20% higher than the same month in 2020.  

R3’s Fitzgerald pointed to the somewhat static month-on-month creditors’ voluntary liquidations as suggesting “that many company directors are continuing to choose to close their businesses rather than attempting to carry on trading in the current climate”.

The figures also highlight the toll businesses have endured through the uncertainty of the Omicron variant and the coinciding support measures (or lack thereof); the rising inflation, which the Bank of England forecasts as hitting 7% in April; and the escalating energy prices.   

“After nearly two years of trading through a pandemic, these factors may increasingly become too difficult for many directors to deal with,” concluded Fitzgerald. “Against a backdrop of continued pandemic-related uncertainty, there is likely to be a significant number of directors who will be increasingly doubtful that their business can survive much longer.

Another option?

Colin Haig, head of restructuring at Azets, has warned that the prevalence of liquidations over administrations is a worrying trend because “everyone is likely to lose in a liquidation with no one getting paid”. 

Haig has recommended that companies consider a going concern solution through an administration “as it will generally keep more people in jobs and potentially result in more debt being paid to creditors”.

What’s next?

While it’s too soon to see the result of the interest rate increase, the Bank of England’s decision to nudge the rate from 0.25% to 0.5% may create pressure for debt-carrying companies.

Claire Burden, a partner at Tilney Smith & Williamson, expects to particularly see this with low margin and smaller businesses as macro-economic factors such as the increased cost of living resulting in wage-pressure impact companies as the world moves out of the pandemic. 

“It may not be easy for SMEs to be able to pass cost increases onto the consumer, leading to short-term liquidity pressures and longer term distress.”

And even those businesses that thrived under the pandemic may be at risk in the future. “Online low-cost retail businesses are now being put under considerable pressure as they struggle to pass price increases onto customers for fear of high volume demand falling away,” she said. 

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