Business insolvencies rise to ten year high

29th April 2022

Latest quarterly figures from the Insolvency Service have indicated that the number of business insolvencies in England & Wales rose to its highest levels since 2012.

The figures show that there were 4,896 company insolvencies registered in Q1 2022, 6% higher than the number of company insolvencies registered in the previous quarter and more than double the number (112% higher) during the same quarter in the previous year. The total number of registered company insolvencies in Q1 2022 was the highest since Q2 2012.

Creditors’ voluntary liquidations (CVLs) were the most common company insolvency procedure (87% of cases), followed by compulsory liquidations (7% of cases), administrations (5% of cases) and company voluntary arrangements (CVAs; 1% of cases). There were no receivership appointments, which are now rare. The number of CVLs increased to the highest quarterly level since the start of the series in 1960.

Christina Fitzgerald, President of insolvency and restructuring trade body R3 said “This has been the busiest quarter for corporate insolvencies since 2012 as firms who have struggled with the economic consequences of the pandemic are now having to deal with the sharp rise in inflation. These statistics provide further proof that while the Government’s COVID support measures prevented an initial sharp rise in corporate insolvencies, the economic damage caused by the pandemic couldn’t be mitigated away forever.:

“The main cause of the increase in corporate insolvencies this quarter is an increase in Creditors Voluntary Liquidations (CVLs), which are now at a level not seen for more than 60 years. It seems more and more directors feel they can’t carry on trading and are choosing to close their business’s doors before they are forced to.”

“Administration numbers have also risen over the last quarter and returned to 2020 levels but are still nowhere near what they were before the pandemic. An increase in administrations suggests that there are a number of insolvent businesses that could potentially be rescued, as that is one of the main purposes of the process and an outcome members of the insolvency and restructuring profession will always aim to secure where possible.”

“The figures published today reflect the tough climate businesses have been operating in over the last quarter. At a point where many businesses needed a return to normality, rising fuel and energy costs have put them under additional strain, and the effects of the increased cost of living has prevented the spending boom many were hoping for from happening.”

“Although the economy has largely returned to pre-COVID levels in many respects, and consumer spending has increased, rising inflation and stagnant wage growth have left many people unwilling and unable to spend money on anything other than the basics.”

“Businesses have also faced the end of the final set of COVID measures and creditors can once again issue winding-up petitions against companies for debts of £750 or more (with the exception of landlords with COVID rent arrears).”

“This is a critical time for company directors and we urge them to be alert to the signs of financial distress and seek advice if they spot them or if they’re concerned about their business and its future.”

Samantha Keen, UK Turnaround and Restructuring Strategy Partner at EY-Parthenon said “The significant increase in insolvencies in the first quarter of the year – over double what we saw in Q1 2021 and above pre-pandemic levels – was expected given the difficult trading conditions facing many businesses.”

“The overall rise in insolvencies has continued to be driven by a large increase in Creditors’ Voluntary Liquidations (CVLs) which increased 117% year-on-year (y/y). Administrations have also increased by 42% y/y, a sign of things to come for the year ahead.”

“Facing the end of all COVID-19 government support measures, rising costs and supply chain challenges, many small businesses are now having to make tough decisions about their long-term future.”

“Companies face a perfect storm of increased commodity and energy prices, supply chain disruption, and a tightening cost of living squeeze. In March, the EY ITEM Club downgraded its 2022 consumer spending growth forecast to 5.1% from the 5.6% expected in early February, with growth expected to fall to just 1.7% in 2023. The result for many businesses is increasing pressure on margins and, unfortunately, many will be unable to adapt.”

“Looking ahead, its likely we’ll see further waves of insolvencies among larger businesses as the impact of rising costs affects their bottom line. Businesses in sectors most affected by fluctuations in cost and supply chain pressures and changes in business confidence, such as retail, food producers, and high energy users – such as chemical and paper manufacturers – are likely to be most vulnerable.”

“Operating against a backdrop of uncertainty means that businesses need to ensure they plan ahead and if necessary, pivot their operations to respond long-term structural changes in their market.”

Insolvencies in the construction sector have jumped in the last month as the UK’s cost of living crisis starts to bite for businesses says Mazars, the international audit, tax and advisory firm. The data shows that 67 construction businesses went bust in February 2022, the highest figures since before the pandemic and up 22% on the number that closed in January.

Mazars says that Britain’s cost of living crisis is now starting to bite for businesses as well as consumers, with the sharply rising cost of construction materials and energy bills pushing more already-struggling construction firms into insolvency.

Many construction contractors already operate on very thin margins and have to deal with issues of late payment by their clients. Even a small rise in costs can be enough to trigger a rise in insolvencies.

Creditors are also now able to file winding-up petitions against businesses that owe them more than £750, after the level of debt was increased to £10,000 during the pandemic. This is also driving up the number of construction businesses closing.

Mike Pallott, Partner in the Restructuring Services team at Mazars, said “Britain’s cost of living crisis is hurting not just households but businesses too.”

“Construction businesses are facing a very tough period. With inflation not yet under control, cost and supply chain pressures are going to get worse for the sector before they get better.”

“With no more Government protection from creditors, we’re likely to see insolvencies continue to rise in the construction industry.”