Summertime sadness for businesses as insolvencies continue to climb

Summertime sadness for businesses as insolvencies continue to climb

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As can often be the way, August was a disappointing month for many, with the dull and dreary weather casting a shadow over plans made for the school holidays. So too, it seems, was August a bad month for the business community – perhaps in some cases linked to the weather, with poorer performance by seasonal businesses reliant on fair weather custom.

The latest insolvency statistics paint a worrying picture for an economy still in recovery after the pandemic, with inflationary pressures persisting and the pain of high interest rates now being felt almost universally by businesses and households alike. 

Insolvencies are on the incline…

The government’s insolvency statistics for August 2023 show a continued upward trend in company insolvencies: an increase of 19% year-on-year since August 2022. Looking at the wider picture, the level of company insolvencies in August 2022 was itself 42% higher than August 2019 (i.e., pre-pandemic levels), demonstrating the prolonged fall-out of the aftermath of the pandemic and ongoing impact on businesses.

It is not difficult to comprehend the struggles facing businesses in the current economic climate: the cost of living crisis, rising interest rates and ongoing wage inflation are rarely out of the news. Businesses with current debt facilities will likely be feeling the impact of 14 consecutive interest rates rises (despite the welcome reprieve in September), while facing increased energy costs, costs of materials, wage bills, coupled with a reduction in consumer spending and squeeze on profit margins. 

Certainly, in the post-pandemic era we have seen an unprecedented number of creditor voluntary liquidations (CVLs) where businesses have reached the end of the road, beyond all hope of rescue through the sale of a viable ongoing business, from which creditors might derive some potential benefit. Again, the trend continues upwards, with an increase of 13% last month compared to the previous August 2022. 

At the outset of the pandemic, the government introduced a range of protections for businesses to safeguard against creditor pressure and to ensure that otherwise viable businesses were not forced into insolvency. One of the measures introduced was the temporary restriction on creditors presenting winding up petitions against debtor companies in the period 1 March 2020 to 31 March 2022 – this resulted in historically low levels of compulsory liquidations during this period. Following the pandemic, HMRC was initially reluctant to take a hard-line against non-paying creditors, preferring to work with struggling businesses and offering leniency for those who sought time to pay arrangements. However, it is notable that in more recent months HMRC has been ramping up enforcement action. August 2023 saw a 45% increase in compulsory liquidations year-on-year. 

…while business rescue rebounds

Perhaps more surprising (and promising for business recovery) is the jump in the number of administrations, up by 45% compared to August 2022 and now exceeding pre-pandemic levels. Until relatively recently, the number of administrations had remained low, but over the past year there has been an upward trend in companies filing for administration. The jump in numbers in August 2023 shows a greater appetite for rescuing parts of what were otherwise failing businesses, typically by way of a pre-packaged administration whereby the ‘pre-packaged’ business is sold shortly after the company enters administration. 

Wilko is one of the highest profile administrations we have seen this year, filing for administration on 10 August 2023. While a pre-pack sale of the Wilko business could not be achieved, certain of the stores have been bought by B&M and Poundland owner Pepco, with The Range purchasing the intellectual property rights to the Wilko brand. Whilst the administration of Wilko did not unfortunately lead to the rescue of its business, the administration did allow the company to continue trading and to secure deals for the sale of its assets to third party purchasers, thereby maximising returns to creditors. More generally, this rise in administrations hopefully suggests that, for ‘turnaround’ investors, there is now a greater appetite and/or better opportunities to restructure and therefore rescue an otherwise failing business.   

On the other hand, the other rescue mechanism in the shape of company voluntary arrangements (CVAs) – which had proved popular for businesses (particularly retailers) pre-pandemic – continues its steady decline in August 2023. Since the start of 2021, there has been little take-up in CVAs, perhaps due in part to restrictions on landlords seeking to enforce payment of pandemic-related rent arrears (another of the government support measures introduced) and in part to the re-introduction of the (secondary) preferential status for certain HMRC debt. 

Both have served to restrict what was, until recently, seen as a helpful mechanism to return a company to solvency, particularly within the casual dining and retailer sectors, which had a number of outlets and faced declining footfall.  

This article was first published in Finance Digest and can be accessed here

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