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Tsunami wave

Insolvency tsunami gathers pace


There may have been a drop in insolvencies, but signs are that it will be a short respite with a sharp rise in the number of businesses going bust ahead.

18th May 2022
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The insolvency tsunami we saw approaching in March may be hitting a short respite but statistics for May are already showing that the wave is gathering pace and heading straight for the business world.

According to the Insolvency Service, there were 1,991 registered company insolvencies in April 2022 (more than double those registered for April 2021), and 39% higher compared to those for the same month in 2019. Creditors’ voluntary liquidations (CVLs) have had the highest rise standing at 1,777 representing a 118% rise compared to April 2021, and 74% higher than April 2019.

Although compulsory liquidations had risen 203% to 91 for April 2022, the figure is still lower compared to pre-pandemic levels. Administrations were also 22% lower for April 2022 compared to April 2019, but 51% higher compared to only a year ago.

“The monthly fall in corporate insolvencies has mainly been driven by a reduction in CVLs. This highlights the role the government’s support initiatives played in preventing the economic damage of the pandemic from translating into an increase in corporate insolvencies,” comments Christina Fitzgerald, president, R3. “The boom many were hoping for when pandemic restrictions ended simply hasn’t happened as the UK has moved from one damaging set of economic stressors to another without any time to draw breath.”

Upward trend

“Although the insolvency statistics for April 2022 show a slight decrease in corporate insolvencies compared with March 2022, the significant upward trend remains,” warns Simon Monks, restructuring and insolvency director, Azets. “While the material increase on this time last year is understandable, due to government support available at that time, it is alarming that there is also a material increase on pre-pandemic levels. This suggests a realignment of economic resource and a clearing out of entities that are no longer economically viable, that might have been able to survive the pandemic due to support schemes.”

Fitzgerald adds: “It also suggests that large numbers of directors lack confidence in their ability to continue trading in the current climate and are choosing to close their businesses now rather than being forced to in the future. Our advice to any directors who are worried about their business is to seek advice and to do it as soon as possible.”

Accordingly, 50 businesses took that advice. The Insolvency Service reports that between June 2020 and April 2022, 38 moratoriums were obtained, and 12 companies had a restructuring plan registered at Companies House.

Corporate insolvencies

Research by RedAlert, the petitions, receiverships, administrations and resolutions service, shows that so far in May 2022 1,048 firms have already gone bust. Among the sectors mainly affected are building and engineering (284); hotel and restaurant sector (127), and the professional services sector (201).

“While the number of compulsory liquidations remains broadly flat, our expectation is that we will see an upward trend in the number of corporate insolvencies as the economy gradually returns to a business-as-usual state. But this should not necessarily be looked on as a bad thing given the continued availability of capital, which can be utilised to put such resource to better use,” says Monks. “There appears to be a realignment of underperforming business as we continue to move away from the pandemic. However, even better-performing businesses are being challenged, not least by the cost-of-living crisis, which has led to the biggest squeeze on real wages since records began.”

Just at a time when businesses are trying to get back to their pre-pandemic economic flows, workers are demanding higher wages to keep pace with the cost of living. Businesses who were once able to absorb rises in input costs, are now finding themselves faced with raising prices to customers just to try to stay in business.

Pandemic aftershocks

As businesses struggle with the aftershocks of the pandemic, they are being hit from every direction. Escalating energy costs are not just hitting consumers; raw material and food shortages, impact of the Russian invasion of Ukraine, supply-chain challenges, are all factors causing inflation to surge and growth to slow around the world. Now with the Bank of England forecasting that a recession is on the horizon (and with recession, we normally see mass unemployment), the future looks bleak. 

To an extent, IPs have been sitting on the sidelines waiting with bated breath for the return of what they would deem “the good old days”, and it seems the days of old are not far off.

During the pandemic, government support of Bounce Back Loans and furlough schemes have kept some businesses afloat. While some IPs and accountants have bemoaned that no government support should have been given, it is important to remember that the pandemic was not the business world’s making. With the government ordering some businesses to close completely or severely curtail their business operations – the government had every right to stick its hand in its pocket.

In the months ahead, the Bank of England will need to achieve a difficult balancing act if it is to ward off a return of a 1970s-style global stagflation. The Bank will need to tread carefully, and we are likely to see 2022 as a pivotal year for monetary policy. Raise interest rates too rapidly and the increased borrowing costs will depress growth, sending the economy into a downward spiral, tipping it into deep recession – and unfortunately, taking the business world with it!

Replies (1)

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By Hugo Fair
18th May 2022 13:04

As so often it's all the data to which we (and Carol presumably) aren't privy that *may* just hold real clues - both as to what has happened and what may be round the corner.

* What %age of insolvencies were of companies set up since the start of the pandemic?
* What %age of them had an outstanding BBL or equivalent (and what %age of last 2 years turnover was from grant-type covid-support - including EOTHO as well as direct grants)?
* What %age of them had fewer than 5 employees (including any directors)?

And the one that most intrigues me (although even less susceptible to finding quantified data about it) ... there has historically been a direct correlation between OMB-style start-ups and high levels of unemployment, so what is causing the opposite now - and will that last?

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