Emergency Budget opportunity to provide lifeline to struggling firms
Insolvencies 42% higher than pre-pandemic levels
Headwinds likely to cause issues even for better-performing businesses in the next 12 months
Insolvency figures released today for August 2022* by the Government’s Insolvency Service showed the number of registered company insolvencies in August 2022 was 1,933. This is 43% higher than in the same month in the previous year (1,348 in August 2021), and 42% higher than the number registered three years previously (pre-pandemic; 1,365 in August 2019).
In August 2022 there were 1,662 Creditors’ Voluntary Liquidations (CVLs), 33% higher than in August 2021 and 73% higher than August 2019. Numbers for other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic, although there were almost four times as many compulsory liquidations in August 2022 as in August 2021, and the number of administrations was more than twice as high as a year ago.
Leading restructuring and insolvency professional Oliver Collinge from PKF GM said: “The large rise in corporate insolvency numbers is not surprising compared to this time last year. But alarm bells ring when there is a material increase on pre-pandemic levels, as we are seeing now.
Many distressed businesses managed to keep afloat through Covid by using the high level of government support available. Most businesses are now repaying BBLS or CBILS loans and many are also still repaying HMRC liabilities deferred during the pandemic, and rising input costs are adding to these cash flow pressures.”
Challenging times ahead as cash flow pressure on businesses grows and even better-performing businesses won’t be immune
Oliver continued: “The current headwinds will create challenges even for better-performing businesses, not only those that were already in survival mode. The inflation rate suggests there may be more interest rate rises to come.The cost-of-living crisis has led to the biggest fall in real pay on record and British retail sales fell much more than expected in August. Another sign that the economy is sliding into recession as the cost of living crunch squeezes households’ disposable spending. Pressure on cash continues, and unfortunately, we expect to see heightened levels of business failures for some time to come.”
Creditors’ Voluntary Liquidations (CVLs)
The increase is primarily driven by Creditors’ Voluntary Liquidations (CVLs), where directors have chosen to place their business into an insolvency process. In August 2022 there were 1,662 CVLs, which is 33% higher than in August 2021 and 73% higher than in August 2019;PKF GM thinks this may partly be because creditors can now take enforcement action, forcing directors to take pre-emptive action. There is also significant anecdotal evidence that many of these liquidations involve small companies which had taken out Bounce Back Loans and are now unable to repay them.
Next week’s Emergency Budget is an opportunity for the Government to provide help beyond energy bills. Businesses PKF GM are talking to need support with business rates and cuts to VAT to help them survive in the aftermath of the pandemic and the current cost-of-living crisis, particularly in the hospitality and leisure sectors.
Oliver Collinge added: “Whilst the Covid loans, support packages and interventions staved off many business closures; the repayments on these loans, together with the worsening macro-economic climate means many businesses are beginning to experience severe cash flow pressure. It’s critical businesses act early and seek advice if they are struggling now or think cash flow may be squeezed in the coming months. The earlier they act, the more options they’ll have to secure the business’s long-term survival.”
A message to company directors
Oliver Collinge added: “There are plenty of proactive things you can do now to build resilience into your business for the post-Covid economy; don’t leave it too late. Having a restructuring professional guide you through the process can be invaluable in getting the best outcome and will also help you understand and mitigate your risk as a director.”
“For struggling businesses, it’s not too late to begin negotiations with landlords and creditors to develop manageable repayment plans. Will revenues be high enough to support your cost base? Will cash flows be sufficient to deal with the additional debt burden (both formal and informal) that has accrued during Covid? Perhaps a CVA is something which should be considered or, where you may need to take the difficult decision to make redundancies to survive, consider applying for government funding to meet the short-term cash impact of this.”
*August 2022 insolvencies:
Of the 1,933 registered company insolvencies in August 2022:
There were 1,662 CVLs, which is 33% higher than in August 2021 and 73% higher than in August 2019;
142 were compulsory liquidations, which is 274% (3.7 times) higher than August 2021, but 27% lower than August 2019;
13 were CVAs, which is 550% higher (6 and half times higher) than August 2021 but 57% lower than August 2019;
There were 116 administrations, which is 111% (2.1 times) higher than August 2021 but 34% lower than August 2019; and
There were no receivership appointments.