Credit, Collections & Insolvency News
Latest quarterly figures from the Insolvency Service have shown that the number of business insolvencies in England & Wales decreased by 4% but rose 18% year-on-year in Quarter 1 (Q1) when compared to Q1 2022.
The figures show between 1 January and 31 March 2023, there were 5,747 company insolvencies made up of 4,739 creditors’ voluntary liquidations (CVLs), 652 compulsory liquidations, 318 administrations and 38 company voluntary arrangements (CVAs). The number of company insolvencies in Q1 2023 was 4% lower than in Q4 2022.
Between 1st January and 31st March 2023 Quarter 1 2023 (Q1) there were 5,747 registered business insolvencies this was 4% lower than in Q4 2022, but 18% higher than in Q1 2022 which was the highest total since Q2 2009.
The number of CVLs remained close to the highest quarterly level since the start of the series in 1960 (Q2 2022). The number of compulsory liquidations also increased, but remained slightly lower than levels seen prior to the coronavirus (Covid-19) pandemic.
The insolvencies comprised of 4,739 creditors’ voluntary liquidations (CVLs), 652 compulsory liquidations, 318 administrations and 38 company voluntary arrangements (CVAs). There were no receivership appointments.
Creditors’ voluntary liquidations (CVLs) were the most common company insolvency procedure (82% of cases), followed by compulsory liquidations (11% of cases), administrations (6% of cases) and company voluntary arrangements (CVAs; 1% of cases). There were no receivership appointments, which are now rare (see glossary for further details).
In Q1 2023, CVLs accounted for 82% of all company insolvencies. The number of CVLs decreased by 2% from Q4 2022, but was 12% higher than during the same quarter last year, after seasonal adjustment. The number of CVLs in the last four quarters have been the highest in the time series going back to 1960.
The number of compulsory liquidations in Q1 2023 was 11% lower than in the previous quarter, but nearly twice as high (92% higher) as in Q1 2022. Numbers have increased from record low levels seen while restrictions applied to the use of statutory demands and certain winding-up petitions (leading to compulsory liquidations). These temporary measures ended on 31 March 2022. The number of compulsory liquidations in Q1 2023 was slightly lower than pre-pandemic levels.
The number of administrations in Q1 2023 was 12% lower than in Q4 2022, but 16% higher than in Q1 2022, after seasonal adjustment. Unlike other insolvency types, there was not a large decline in numbers of administrations at the start of the pandemic (Q2 2020). However, the number of administrations dropped in 2021 to the lowest annual level since 2003, before increasing in 2022. The number of administrations in Q1 2023 remained lower than pre-pandemic levels.
The number of CVAs was 52% higher than in Q1 2023 than in Q4 2022, and also 52% higher than Q1 2022. CVA numbers remain low compared to historical levels.
The five industries (in accordance with SIC 2007) that experienced the highest number of insolvencies in the 12 months ending Q1 2023 were:
Commenting on the latest figures, Nicky Fisher, President of R3, the insolvency and restructuring trade body said “A small dip in overall corporate insolvency levels doesn’t hide the fact that more directors are choosing to shut up shop and more creditors are choosing to chase unpaid debts than 12 months ago. Firms are still struggling as the trading climate remains challenging, and unless the economic picture improves, it’s unlikely numbers will drop in the near future.”
“Despite the quarterly fall in numbers, Q1 2023’s corporate insolvency figures are the highest first quarter’s figures for more than a decade and the second-highest overall figures in the same period as firms find themselves caught between spiralling costs and increasing creditor pressures.
“Numbers of Creditors’ Voluntary Liquidations, which are the highest number we’ve seen for a first quarter in more than a decade, are the key driver of this, and reflect the fact that many directors are choosing to close their businesses now while the option is theirs to exercise.
“Compulsory Liquidation numbers are lower than three months ago, but are significantly up on this time last year as creditors make use of the change in winding-up petition legislation to pursue the debts they are owed.
“Alongside these issues, firms are operating in a world of rising costs and falling margins as consumers cut spending right back to the basics – and even then looking to save money wherever they can.
“In this climate, directors need to be vigilant and seek advice at the first sign of issues with their business, or the second they start to worry about it or its finances. If stock starts to build up, cashflow or bill payments become a concern, or the managers are worried about the business in any shape or form, that’s the time to seek advice.
Gareth Harris, partner at RSM UK Restructuring Advisory, said: ‘Despite recent predictions that the UK will avoid a recession in 2023, these figures highlight the difficult economic terrain many struggling businesses are still navigating. Stubbornly high inflation, (particularly in food), the highest interest rates since 2008, significant energy prices year on year and the inability to kick start UK productivity levels are all contributing to the financial challenges and ultimately insolvency levels.
‘The disappointingly high level of both types of shut down liquidation processes shows that those companies who have come out of the pandemic with additional debt and weaker balance sheets are encountering a toxic combination which in many cases is proving impossible to overcome.
‘But there is some room for optimism. By the end of 2023, we predict overall insolvency numbers will decrease by around 24% in Q4 2023 from their peak in Q4 2022. The drop is likely to come mainly from a fall in “shut down” Creditors’ Voluntary Liquidations where the catch-up from the low points of Covid and government support will largely be flushed out.
‘Despite these current high insolvency numbers our experience is that UK businesses are showing robustness and resilience despite the economic challenges and in the best-case scenario we believe the drop in insolvency numbers could be as large 28% from Q4 2022 to Q4 2023.
Samantha Keen, UK Turnaround and Restructuring Strategy Partner at EY-Parthenon and President of the Insolvency Practitioners Association (IPA) said “The significant year-on-year rise in corporate insolvencies has again been driven by Creditors’ Voluntary Liquidations (CVLs), with business owners calling time on their companies rather than looking at rescue options. CVLs accounted for 82% of all insolvencies in Q1, a 12% increase from the same period in 2022.”
“As well as contending with inflation, falling business confidence and supply chain issues, many companies are now also dealing with increased working capital demands and a challenging credit environment which is intensifying liquidity issues.”
“EY-Parthenon’s latest Profit Warnings report found that warnings from UK-listed companies in Q1 2023 reached their highest first quarter total since the start of the pandemic. Thirty-five per cent of these warnings cited delayed or cancelled contracts, up from 21% for the same period last year, as prolonged stresses have a direct impact on business profitability.”
“As a result, we are seeing insolvency and restructuring activity rising – our data shows that of the 31 companies that have entered the ‘three-warning danger zone’ since the start of 2022, 29% have since gone into administration, been sold, or are in a sale process.”
“However, there are some reasons to be positive. The latest analysis from the EY ITEM Club Spring Forecast has found that the UK economy is slowly turning a corner and should avoid recession this year. Many businesses are facing a prolonged recovery so it’s important that management teams recognise the signs of stress early and build solid operational resilience to optimise growth opportunities and withstand further economic surprises.”
David Kelly, Head of Insolvency at PwC said “Market conditions have been some of the most challenging in recent memory, causing a broad range of companies to fall into distress, irrespective of their sector. We’re seeing an increasing domino effect of insolvencies where firms fail and are unable to pay their debts, thus causing the failure of other firms to whom they owe money. While this has particularly impacted smaller companies, we’re beginning to see larger, more resilient companies come under significant pressure too.”
“Our analysis of administration and liquidation appointments reflects the pressure being felt by small businesses – approximately 98% of liquidations and 70% of administrations have been weathered by companies with turnover of less than £1m. While the scale of these businesses is relatively small, they are an important part of the UK corporate ecosystem and each failure represents a loss of business for suppliers, a loss of employment and a loss of livelihood for many owner managers.”
“There have been a high number of compulsory liquidations – nearly twice as high (92% higher) as the same quarter last year. We’re seeing more corporates taking action against long outstanding debts with an increase in 7 day ultimatum letters, counting down to court action, CCJs and winding up petitions. Unfortunately it seems some directors are not confronting the issues they are facing and are not engaging with their creditors in the same manner as they did during the pandemic.”
Carla Matthews, Head of Contentious Insolvency and Asset Recovery at PwC said “Businesses are caught in a Catch-22 between calling in their debts as creditors and ensuring they are maintaining and monitoring their own cash flow situation. The current environment has shown that businesses are prepared to push the button far earlier than usual when it comes to recovering debts – they are simply less tolerant and forgiving of IOUs.”
“With increased insolvencies come increased risks of fraud, asset removal and concealment. I would expect to see more activity regarding aggressive asset clawbacks as creditors seek to maximise their recoveries. The potential knock-on effect would be an increase in the transfer of assets into different asset classes and jurisdictions to create a frustrating recovery environment. Offshore jurisdictions with difficult legal recovery environments may well see an increase in activity, alongside a general uptick in digital assets investment.”