Rising costs and cash flow pressures squeezing businesses
Corporate Insolvencies
Insolvency figures released for July 2022* by the UK government’s Insolvency Service showed corporate insolvencies at 1,827, up 67% compared to the same month last year (1,827 in July 2022 and 1096 in July 2021).
They were 27% higher than the number registered in the July before the pandemic (1,440 in July 2019).
Leading restructuring and insolvency professional Oliver Collinge from PKF GM in Leeds 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, and there’s open talk of a recession. The cost-of-living crisis has led to the biggest fall in real pay on record, and households are reining in 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 July 2022, there were 1,609 Creditors’ Voluntary Liquidations (CVLs), 60% higher than in July 2021 and also 60% higher than July 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.
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.”
Other types of insolvencies
Numbers for other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic, although there were 3 times as many compulsory liquidations in July 2022 as in July 2021, and the number of administrations was twice as high as a year ago.
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.”
*July 2022 insolvencies – breakdown:
Of the 1,827 registered company insolvencies in July 2022:
· There were 1,609 CVLs, which is 60% higher than in July 2021 and 60% higher than in July 2019;
· 132 were compulsory liquidations, which is 200% (3 times) higher than July 2021, but 47% lower (half the number) than July 2019;
· Five were CVAs, which is 17% lower than July 2021 and 87% lower than July 2019;
· There were 81 administrations, which is 103% (2 times) higher than July 2021 but 45% lower than July 2019; and
· There were no receivership appointments.
