The rising case of insolvencies

The effects of the pandemic are still being keenly felt across the UK market with the never-ending rise of insolvencies. But why exactly is there an uptick in insolvencies within the industry and how can businesses potentially prevent an insolvency process?

“One of the difficulties for a business owner or an entrepreneur is to admit that they have an issue and reach out to take advice,” says Mark Supperstone, managing partner at the UK business advisory and investment practice, ReSolve. In January 2022, there were 1,560 registered company insolvencies in the UK, according to the Insolvency Service, which is more than double the number registered in the same month in the year prior. Additionally, 1,358 Creditors’ Voluntary Liquidations (CVLs) were reported at the beginning of the year, more than double the number year-on-year, and up 34% from January 2020.

As a restructuring firm, ReSolve seeks to help businesses that are hit with financial difficulties, offering general restructuring services, helping them to raise finance, assisting negotiations with creditors, and liaising with HMRC, for example. As Supperstone explains, the firm assists a range of solvent liquidations, where a business has largely come to the “end of its life”. It deals with liquidations to distribute any surplus funds back to shareholders, which is “quite a common liquidation” for tax efficiencies for owners of businesses.

Given the economic turmoil permeating the UK, a common theme Supperstone identifies within the market is that, too often, businesses identify their financial difficulties too late. “Too often businesses come to us asking for help as they can’t pay their wages tomorrow, and that becomes quite difficult,” he shares. If a business owner forecasts a problem early on, restructuring firms are able to create a plan together that sees that business potentially avoiding an insolvency process. Supperstone declares that “the earlier a business seeks help, the more chance we have of helping that business survive”.

But how exactly can a business forecast their business operations in a timely manner? A “well run business should be preparing regular cash flows” in order to predict whether the firm can carry out its responsibilities, such as paying employee wages and making payments to HMRC and suppliers. Supperstone states: “A business owner should be realising there are problems coming up, or that they have got problems now. A lot of the time, business owners leave it right to the last minute on the basis that they hope something’s going to come in, or they believe they can turn it around on their own.”

Looking at the current state of the market, there has been a stark rise in insolvencies, however, when you “dig down into the details”, a lot of the figures are made up of liquidations rather than administrations. According to the Insolvency Service, of the 1,560 registered company insolvencies registered in January 2022, the number of CVLs was 122% which is 2.2 times higher than in January 2021 and 34% higher than in January 2020, and the number of compulsory liquidations was 131%, 2.3 times higher compared to January 2021. However, out of the 1,560 registered company insolvencies in January 2022, only 71 were administrations, which is 3% lower than January 2021 and 58% lower than January 2020.

With administration levels remaining “relatively low” year-on-year and on a two-year basis, Supperstone highlights that an administration is “more a rescue procedure, whereas a liquidation is just a business closed down”. He remarks: “The reasons for this are many and buried, but there’s still quite a lot of cash out there for businesses that are in trouble. So if there’s a good business that is suffering financially, there are a lot of lenders that business can go to and try to seek either short term or long term finance; that is probably keeping the number of insolvencies lower than what they should be.”

“We can foresee problems coming up in the future, because a number of businesses throughout the pandemic borrowed quite heavily, whether it be bounce back loans, the Coronavirus Business Interruption Loan Scheme (CBILS), or other types of loans,” Supperstone remarks. He notes that this debt must be paid back at some point and, consequently, restructuring firms will likely see those businesses perhaps struggling to pay the debt back, which “might lead to problems in the future”, hence why the number of administrations is currently lower compared to the number of liquidations.

With that being said, why is there an uptick in insolvencies throughout the UK? “The pandemic has been very difficult for a number of businesses over the past couple of years,” Supperstone asserts. At the start of the pandemic, the government was “very supportive” in lending money to businesses, and a “significant amount” was borrowed on bounce back loans and savings loans. Figures published by HM Treasury reveal that businesses were supported through the pandemic with nearly £80bn of emergency government-backed loans. 

These loans kept a lot of businesses going, including a lot of businesses that “may not have even been impacted by the pandemic” and were perhaps struggling pre-pandemic. Supperstone imparts: “They have then been supported by government measures and that’s allowed them to continue trading longer, albeit another six months, a year, or 18 months, but those were arguably dead businesses already.” He explains that those businesses have ended up running out of cash; “I’d put those businesses into the camp where they possibly weren’t good businesses and have been unable to raise finance, and therefore had to close down and go into liquidation,” he explains.

However, the businesses that are “arguably viable businesses and good businesses” but have struggled because of the pandemic have been “quite successful” in raising finance or restructuring their balance sheet by deferring payments to creditors. “That’s why the administrations are slightly lower, but I think liquidations would be higher because arguably, those were businesses that were struggling pre-pandemic or have struggled throughout the pandemic,” Supperstone notes. He conveys that these are potentially smaller businesses where the owner had “decided it’s too hard and has closed its doors”. “The larger businesses, those that have a potential future, have been able to raise finance because there is still a lot of cash flowing around in the UK economy,” he argues.

Additionally, what is “not shown in the figures” is the number of restructurings that are being undertaken where it’s not a formal insolvency. Supperstone explains: “We’re doing quite a lot of work for clients at the moment where it’s not a formal insolvency, so it won’t get recorded in the numbers. It’s the process of helping businesses raise finance, to help save them or when negotiating with some of their creditors.” Therefore, there’s “a lot of restructuring going on behind the scenes” that doesn’t get reported in the numbers. 

Drilling down the figures to specific industries, construction is seeing the “largest” uptick in the number of insolvencies over the past year, although the numbers “jump around”. Supperstone remarks: “Over the past 18 months to two years, I’ve seen quite a lot of insolvencies in the travel industry because that was one of the hardest hit areas, but a lot of those businesses are now managing to see their way through as international travel returns.” As a firm, ReSolve has also seen the retail industry take a large hit throughout the pandemic, followed by restaurant businesses who were forced to close their doors.

What can businesses do to prevent undergoing insolvency? Supperstones recommends that the owners of these businesses remain “on top” of their numbers with at least weekly cash flows that they’re preparing, if not daily cash flows, understanding the financial position of their business, and they should be speaking to creditors regularly and keeping creditors updated as to what is going on. “If they feel that they are still struggling, then I would be saying they need to take advice from the appropriate people and take that advice as early as they possibly can,” he notes.

With that being said, how does the rise in insolvencies affect accountants? “If an accountant has a client whose business goes through an insolvency process, it is possible that they will lose that client and therefore that might be income they lose going forwards,” Supperstone declares. Accountants need to be “conscious” of their clients and speak to them regularly in order to understand what is going on with their clients’ business. “Good accountants” are those who seek to understand their clients’ businesses, therefore it’s important that the accountants keep a “good eye” on the businesses and their clients to make sure that if they are in need of help, the accountant is there to try and help them and support them, Supperstone explains.

Additionally, he advises accountants to identify issues at an early stage because business owners aren’t typically accountants and they consequently don’t always understand the financial aspect of running a business. He emphasises that it’s important that the accountant tries to highlight any issues to those businesses as soon as they arise. “With everything going on at the moment, coming out of the pandemic, it is imperative that accountants are on top of their clients, understanding them and keeping a close eye on their finances regularly, particularly those that may be potentially insolvent,” Supperstone highlights. Ultimately, if they do spot an issue, the next step is reaching out to an investment company to assist their clients, “hopefully at an early stage”.

How can insolvencies, particularly liquidations, be prevented? Throughout the pandemic, turnover has “dried up overnight” for a number of businesses, including “well-run businesses”. “The best way of trying to avoid insolvency is by ensuring there’s good management teams in place, and businesses are being run efficiently,” Supperstone reveals. This includes understanding the numbers and finances so if there is a problem, the directors can deal with the problem early as opposed to waiting until the last minute, through cash flows.

Additionally, business owners must be “in dialogue” with the stakeholders of those businesses to alert them of any issues, and having “open and honest” conversations with creditors regarding your businesses standing which “helps a business survive and helps the goodwill with the creditors”. Supperstone imparts: “The absolute worst thing a business owner can do is to do nothing and just carry on trading, not take advice, and let their position get increasingly worse.”

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