Are company insolvencies on the rise?

No one goes into business thinking they will have dealt with insolvency; however, the stark reality is that many businesses end up faced with that very situation. We are living in uncertain economic times, and as a consequence, company insolvencies are on the rise.

The rise in company insolvencies

According to the latest report by the Insolvency Service, 4,308 companies entered insolvency in Q3 2018 alone. The total company insolvencies represent an increase of 8.9% as compared to Q2 2018. When compared to the third quarter of 2017, the underlying number of company insolvencies increased by 19.3%.

The report states that this increase was driven by a rise in creditors’ voluntary liquidations which now sit at their highest level since Q1 2012. Creditors Voluntary Liquidation (CVL) is an option exercised by company directors or shareholders enabling them to ‘voluntarily’ close or “wind up” companies that can no longer viably trade. The underlying number of CVLs in Q3 2018 was 3,083, up from 20.7% in Q2 2018.

This rise in company insolvencies is not industry specific, but rather across the board. That said, the highest number of insolvencies was seen in the construction industry with 2,924 insolvencies. This was up by 3.8% in the last 12 months. The second highest underlying number of new company insolvencies was the wholesale and retail trade & repair of vehicles industrial grouping with 2,270 new company insolvencies in the 12 months ending Q3 2018. This was up 2.4% as compared to the 12 months ending Q2 2018.

Key causes of insolvency

According to Duncan Swift, Vice President of R3, the Association of Business Recovery Professionals in the UK, “The key causes of insolvencies seen by the insolvency profession are familiar. Rates problems, particularly for retailers, are frequently mentioned, and the Chancellor’s rates-relief announcements in the Budget have come too late for some.”

Swift also noted uncertainty over the shape of Brexit as having an unsettling effect on companies both large and small, as well as low consumer confidence, high personal debt levels, upwards pressure on wages and possible rise in future interest rates.

Even the smallest shift in the economic landscape can have a tremendous effect on the business eco-system, with so much up in the air it’s no wonder company insolvency rates have skyrocketed.

Swift raised additional concerns with the upcoming restoration of HMRC as a preferential creditor in insolvencies. “With HMRC legislates its way towards the front of the queue for creditor repayments after company insolvencies, other creditors will receive less back after insolvencies, with a knock-on effect for their own finances. The change may also affect banks’ appetite for lending to distressed businesses, jeopardising business rescue. This will be something to watch in 2020 when the changes are due to kick in,” Swift said.

In so far as to what will happen in the future, only time will tell.