Business insolvencies jumped 40% in May

Latest figures from the Insolvency Service have shown that the number of business insolvencies in England & Wales for May 2023 was 2,552, 40% higher than in the same month in the previous year (1,825 in May 2022). Th figures were at higher than levels seen while the Government support measures were in place in response to the coronavirus (Covid-19) pandemic and also higher than pre-pandemic numbers.

Business insolvencies increased by 51.2% in May 2023 to a total of 2,552 compared to April’s total of 1,688, and increased by 39.8% compared to May 2022’s figure of 1,825.

Of the 2,552 registered company insolvencies in May 2023, there were 2,181 CVLs, which is 38% higher than in May 2022, 189 were compulsory liquidations, which is 34% higher than May 2022. 31 were CVAs, which is 121% higher than May 2022 151 administrations, which is 80% higher than May 2022 and no receivership appointments.

The data showed there were 189 compulsory liquidations in May 2023, 34% higher than in May 2022. Numbers of compulsory liquidations have increased from historical lows seen during the coronavirus pandemic, partly as a result of an increase in winding-up petitions presented by HMRC.

In May 2023 there were 2,181 Creditors’ Voluntary Liquidations (CVLs), 38% higher than in May 2022. Numbers of administrations and Company Voluntary Arrangements (CVAs) were higher than in May 2022.

The number of company insolvencies in May 2023 was 40% higher than the number in May 2022. The increase in company insolvencies compared to the same month last year was driven by an increase in the number of CVLs, which are the most common type of company insolvency, although the number of compulsory liquidations, administrations and CVAs also increased in comparison to the same month last year. The increase in compulsory liquidations is partly as a result of an increase in winding-up petitions presented by HMRC.

Of the 2,552 registered company insolvencies in May 2023, there were 2,181 CVLs, which is 38% higher than in May 2022, 189 were compulsory liquidations, which is 34% higher than May 2022. 31 were CVAs, which is 121% higher than May 2022 151 administrations, which is 80% higher than May 2022 and no receivership appointments.

Commenting on the latest figures, Nicky Fisher, President of R3, the UK’s insolvency and restructuring trade body said “Three years of economic turmoil is taking its toll on businesses. The corporate insolvency figures published today are the highest we’ve seen since January 2019 as the fallout from battling the effects of the pandemic, coupled with rising costs, increased creditor pressure, and high inflation, is causing more businesses to turn to an insolvency process to help resolve their financial issues.”

“The key driver of the rise in numbers is the increase in Creditors Voluntary Liquidations, which are also at a near-four and half year high and more than twice the number they were in May 2019. More and more directors are running out of time and options, and are choosing to liquidate their businesses before the choice is taken away from them.”

“Firms are operating in a market where people are spending cautiously, costs are increasing and suppliers are chasing debts in an attempt to manage their own cashflow challenges, which is creating a tough climate for businesses of all sizes at a time where they needed an injection of cash.”

“While the summer months might provide some relief from energy costs, firms will have to pay to keep their premises, staff and customers cool, which will hit any potential savings.”

“Going forward, interest rates and inflation will continue to create challenges for businesses seeking funding over the summer, and could be the tipping point for those businesses who are hanging in there at present.”

“Directors need to remain vigilant to the signs their business could be distressed and seek advice if they start to see stock levels increase, cashflow become an issue, or begin to experience issues paying rent, staff or bills.”

Lindsey Cooper, Partner at RSM UK Restructuring Advisory, said “The number of insolvencies has increased both in comparison to the same period last year but also in comparison to last month. This has been fuelled by a rise in CVLs with directors of these companies deciding that they have exhausted all recovery options and have no alternative other than to cease trading. This is not surprising given the high level of debt many businesses have on their balance sheets and the rising costs of servicing this debt.”

“With the continued increase in interest rates it is becoming more and more difficult for some businesses to refinance and we expect more failures amongst those businesses which are already in a vulnerable cash position.  However, it is encouraging to see that more companies are making use of the CVA procedure whereby the company comes to a compromise agreement with its creditors to allow it to carry on trading. Administrations, which also allow a restructuring of a business, have also increased and we expect to see more management teams making use of these corporate rescue tools in coming months.  Both processes require time to plan so it is important that directors are taking advice at an early stage.”

Mark Supperstone, Managing Partner at ReSolve said “While the pandemic is in the rear view mirror for most, these statistics show that many businesses are still dealing with the aftereffects. ReSolve has recently been appointed as Administrator to London Irish after it was unable to recover financially from the pandemic, following the closure of stadiums and subsequent loss of significant matchday revenue. Sadly, this is the third Premiership rugby team this year to fall into administration and we are seeing this across other businesses in the leisure and hospitality sectors. We are also seeing increasing numbers of tech businesses approach us, finding that the goal posts set by their investors have moved and therefore they are unable to secure their next round of investment. It seems that many investors have gone cold in the current climate.”

“The uncertainty around interest rates is unlikely to have helped matters with concerns about future higher costs of debt and overheads and it is likely more pain will be experienced in the second half of 2023.”

Nick O’Reilly, Director of Restructuring and Recovery at MHA said “The UK is suffering the consequences of the government’s reckless Covid-19 loan scheme, with greater numbers of companies now failing who were previously propped up during the pandemic by government lending.”

“The government’s Coronavirus Business Interruption Loan Schemes and Future Funds should have served companies who had the ability to survive and with adequate cash reserves. Instead loans were given to anyone who asked, regardless of whether they could pay them back. Three years after the pandemic began, high inflation, burdensome energy prices and low consumer confidence has prevented millions of businesses from recovering, with many now facing the wall.”

“London Irish’s administration can be partially credited to a government loan scheme for professional sports. As the club was unable to have supporters in the ground, they had to borrow money, which was provided without sufficient due diligence and sustainable planning. This was exacerbated by much of their income being spent on renting Brentford FC’s stadium and not owning a stadium of their own. Loans should have been provided against property assets which would have forced London Irish to look elsewhere for ongoing funding.”

“The majority of companies entering administration will be those that would’ve failed, if Covid-19 never happened. For the numbers to return to normal levels, the Government will have to let the market act organically with the challenging economic environment set to keep insolvencies and administrations high until 2024 at least.”

Daniel Staunton, Senior Associate in the Restructuring & Insolvency team at Kingsley Napley LLP, said “Today’s insolvency statistics show that in May 2023 there were 2,552 registered company insolvencies, 40% higher than the same month last year and 867 (51%) more than April 2023 (although April’s figure represented a dip from March). Not only are levels higher than pre-pandemic, but they have also reached a new peak.”

“A similar pattern applies to CVLs – at 2,181 these were notably up by 813 from April 2023 and 38% higher than a year ago. The May 2023 figures are also even higher than the last peak in March 2023. Compared to the trend during lockdown and the pandemic it seems creditor pressure is intensifying. In particular, HMRC is now taking enforcement action more readily presenting an increased number of winding-up petitions and enjoying the benefit of preferred status once again as a creditor in insolvencies. At the same time, there was also an increase in traditional rescue procedures – 31 CVAs (121% higher than May 2022) and 151 administrations (80% higher than May 2022) suggesting it is not all doom and gloom.”

“There were 189 compulsory liquidations in May 2023, only marginally up on the previous month’s figure and up 34% on the same period last year. Whilst the global Covid pandemic is largely over, many companies are still suffering from the long-term economic effects of the same, and many have been unable to turn around their businesses to make up for the long periods of significantly reduced turnover during that period. Certain sectors are under strain more than others, especially retail, hospitality, leisure and construction. The financial issues these companies face have been exacerbated by continued increasing inflationary measures, in particular energy prices, rising interest rates, restricted consumer spending, and a quasi-recession hitting the SME market in particular. The government’s borrowing costs are also reported to be at their highest rate since the Liz Truss mini-budget that sent the markets into turmoil. All of this has had an adverse impact on turnover, profitability, and increased creditor enforcement action has shortened the timescale that companies have in practice to turn their businesses around. Ultimately ‘cash is king’ particularly at a time when interest rates continue to rise.”

“Our expectation is that company insolvencies in the UK will continue to rise for the next 6 to 9 months especially if the mooted 0.5% increase in the Base Rate next week comes to pass with fears interest rates may reach as high as 5.5%. Unlike the 2009 recession, SMEs are especially vulnerable, and since reduced consumer spending appears likely to be ongoing in the short/mid-term, cashflow issues will continue to be a challenge. On 26 May, the Bank of England reported higher growth than anticipated in Q2, so the earlier fears of an immediate (technical) recession appear to have abated for now but the economic outlook is still concerning.”

“The insolvency profession has an essential role to play right now and it is ready to save businesses and jobs in a difficult economic environment. As always, the message to directors of struggling businesses is to take early advice in order to maximise the time available to find a solution to save their business, whether this be an informal workout, a moratorium in order to protect the company for a period of time in order to allow refinancing, a Company Voluntary Arrangement or a Restructuring Plan amongst other possible solutions.”