Insolvency storm clouds are gathering

April 19, 2023

Spring may be well underway, but the chill wind is picking up and the sky is darkening for many businesses.

Company insolvency figures for March now appear to reflect more fully the economic woes facing the UK and the many cost pressures felt by enterprises of all sizes at the moment. Corporate insolvencies increased by 37.7% in March 2023 to a total of 2,457 compared to February’s total of 1,784 and were up by 15.9% on March 2022. They are almost double the figure for March 2020, when the first Covid lockdown began. The jump is largely driven by the three-year high in Creditors’ Voluntary Liquidations – businesses owners throwing in the towel while it’s still their decision.

Personal insolvencies also soared by more than a third in March 2023 from February’s total of 8,237, although they were down a shade on March 2022 numbers.

Most alarming, however, is the more doubling year-on-year rise in compulsory liquidations to 288 in March. The figure is chiefly a result of a hike in winding-petitions brought by HMRC and it suggests that, for many businesses with tax debts, the authority’s patience is wearing thin. Forbearance during peak-Covid and beyond was generous and HMRC is generally reluctant to force companies into liquidation, wasting time and public resources, until it has exhausted all other routes to collect.

Huge energy costs, employees’ pay demands and higher interest rates continue to paint managers into a corner. Poor cashflow is the biggest killer of businesses, particularly SMEs. Robbing Peter to pay Paul is too often a miserable combination of late settlement with suppliers and non-payment of corporation tax and/or VAT.

Sensible managers won’t bury their heads in the sand and will take action sooner rather than later to keep their businesses afloat and stay on the right side of HMRC:

  • Get on the front foot with tax. Engage and explore a time to pay arrangement. Being unresponsive only aggravates HMRC and hastens a winding up petition
  • Look at extending credit terms. Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
  • Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.

On the flip side, suppliers to troubled companies must have the confidence to chase payment and enforce their terms, regardless of the perceived risk of upsetting  a customer: if a business agreement is too fragile to able to discuss money indisputably owed, then it will invariably lead to a bad debt, at least in part.

All businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to minimise the impact of late payments.

Written by our analysts’ team at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

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