Credit, Collections & Insolvency News
Latest quarterly figures from the Insolvency Service have shown that the number of business insolvencies in England & Wales jumped to 13% in Quarter 2 (Q2) 2023 compared to Q2 2022, and reached the highest level since Q2 2009, Q2 figures were also 8.9% higher than in Q1.
The figures show between 1st April and 30th June 2023, there were 6,342 company insolvencies, made up of 5,240 creditors’ voluntary liquidations (CVLs), 637 compulsory liquidations, 409 administrations and 56 company voluntary arrangements (CVAs). CVLs are at their highest since the time series began in 1960.
The number of CVLs was the highest quarterly level since the start of the series in 1960. In Q2 2023, CVLs accounted for 83% of all company insolvencies. The number of CVLs increased by 9% from Q1 and was 7% higher than during the same quarter last year, after seasonal adjustment.
The number of compulsory liquidations in Q2 was 5% lower than in the previous quarter, but 67% higher than in Q2 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 31st March 2022. The number of compulsory liquidations in Q2 was slightly lower than pre-pandemic levels.
The number of administrations in Q2 2023 was 30% higher than in Q1 2023, and 34% higher than in Q2 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 and the first half of 2023.
Whilst the number of CVAs was 47% higher in Q2 2023 than in Q1 2023, and 75% higher than Q2 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 Q2 2023 were:
Higher insolvencies in the 12 months ending Q2 2022 have been driven primarily by increases in the ‘Construction’, ‘Wholesale & retail trade’ and ‘Accommodation & food service’ sectors, whereas the ‘Administrative & support services’ and ‘Professional, scientific and technical’ sectors have shown much smaller increase.
Nicky Fisher, President of R3, the UK’s insolvency and restructuring trade bodysaid “Corporate insolvencies have hit a 14-year high this quarter – and this is due to a rise in Creditors’ Voluntary Liquidations, administrations and Company Voluntary Arrangements. Although Compulsory Liquidations have fallen compared to the last quarter, numbers for this process are the highest we’ve seen in the second quarter of the year since 2019.”
“More and more businesses are running out of road or rope. Directors are choosing to close down their firms while the decision is still theirs, while an increasing number of creditors – including HMRC – are turning to winding-up petitions to recover the debts they’re owed.”
“When the pandemic ended, many directors thought and hoped things would improve, but instead they’ve faced rising costs, supply chain issues and a customer base that is tightening its purse strings to cope with the cost of living.”
“Business owners remain worried about customer demand, rising costs and the state of the economy, while high interest rates may affect access to rescue funding and could deprive saveable firms of a lifeline. Unless the economic picture improves, it’s likely more businesses will need an insolvency process to help resolve their financial issues, and numbers will remain high throughout the rest of this year.”
Lindsey Cooper, Partner at RSM UK Restructuring Advisory, said “The large rise in total insolvencies is not surprising as 83% of them relate to small businesses entering into a liquidation process where directors of these companies have decided that they have exhausted all recovery options and have no alternative but to cease trading. Many of these businesses have high levels of debt on their balance sheets and little or no reserves. They have managed to hold on up until now with the help of the Covid support measures.”
“With the rise in interest rates and hikes in inflation, businesses that previously benefitted from cheap loans and ran on very small margins are now facing significant challenges especially when it comes to renewing bank facilities or refinancing. We expect the number of liquidations to continue to increase in the short term.”
“The cost of finance is also impacting larger businesses and there is a steep rise in CVA and administration numbers in the quarter. The number of administrations has increased by 95 (30%) over the last quarter and the number of CVAs by 18 (47%). We expect this trend to continue as businesses make use of these corporate rescue procedures, including the new restructuring plan process, to restructure their balance sheets. There is some good news in that inflation is falling, however, whilst goods inflation is falling fast which is positive for manufacturers and construction, wage inflation is stickier, so it is likely that services industries where labour is a major cost, will find conditions more challenging.”
Samantha Keen, UK Turnaround and Restructuring Strategy Partner at EY-Parthenon said “Quarterly company insolvencies reached over 6,300 for the first time since 2009 in Q2 as many businesses struggled to contend with a sustained mix of pressures.”
“Although company insolvencies have been steadily increasing over the last 18 months, largely driven by Creditors’ Voluntary Liquidations (CVLs), in Q2 there was a significant uplift in the number of compulsory liquidations which rose 67% year-on-year.”
“The current low-growth, high-inflation and relatively high interest rate environment has meant many businesses have faced building pressure over the last 12 months which is now translating into distress.”
“The increasing cost of refinancing options available to companies in this higher interest rate environment are now having a direct impact on profitability. According to EY-Parthenon’s latest Profit Warnings report found that nearly one-in-five UK-listed companies issued a profit warning in the last 12 months, with 20% citing tighter credit conditions – the highest level since 2008. ”
“As we’ve seen with previous economic downturns, an increase in restructuring activity traditionally comes after a peak in profit warnings with many businesses looking to implement restructuring plans as a rescue solution rather than insolvency. In Q2 there was a 34% year-on-year rise in Administrations and there’s likely to be a further uplift in restructuring in H2 2023 as businesses look at options to safeguard their long-term survival.”
“The tighter lending environment will have an ongoing impact on profitability so it’s imperative that businesses continue to build solid operational and financial foundations as well as conduct robust forecasting to ensure they are fully equipped to adapt to changing conditions in their market.”
Marieta van Straaten, Legal Director in the Restructuring & Insolvency team at Kingsley Napley LLP said “The figures released today show that the number of companies going insolvent was the highest since Q2 2009. Certain sectors remain under strain, especially retail, hospitality, leisure and construction. Many companies have still not recovered following the global Covid pandemic, and with high interest rates and low consumer confidence, these companies are struggling to survive. Although inflation fell to 7.9% in the year to June 2023, ahead of market expectations, it is still far above the 2% where the Bank of England wants it to be before it can even consider a pause in the interest rate hikes we have become accustomed to since Q4 2022. Our expectation is that company insolvencies in the UK will continue to rise for the next 4-6 months as the cost of living crisis continues.”
“On 13 July 2023 the Office for National Statistics reported that 24% of trading businesses saw lower turnover in June 2023 compared to May 2023, and 18% of businesses reported a decrease in domestic demand for goods and services in June 2023 compared with May 2023. This dampening demand will also impact businesses if it signals a new trend.”
“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.”
