One swallow doesn’t make a summer

April 29, 2024

Optimism is generally a good quality when running a business. It fosters positive energy and a can-do approach, without which success is much more difficult. Nonetheless a healthy dose of realism might be useful when considering the recent fall in corporate insolvencies.

The latest figures from the Insolvency Service show that 1,815 companies were recorded as insolvent in March 2024, a 17 per cent fall on the same month the previous year. It was also a clear drop from the 2,177 insolvencies in February. Nonetheless, the figures are much higher than levels seen both during the COVID-19 pandemic and between 2014 and 2019 – a monthly average of 1,300.

It’s important to take a balanced view when assessing the landscape, as well as the financial health of an enterprise and, in turn, its customers. The improved picture was driven chiefly by a 16 per cent fall in Creditors’ Voluntary Liquidations (CVLs) – company directors throwing in the towel and winding up businesses while the decision is still theirs.  In addition, the number of court-ordered compulsory liquidations was 261 in March, still relatively high. There is no doubt that the business environment is still extremely tough and the high costs of operating remain, despite headline inflation retreating towards the Bank of England target.

While the Bank is beginning to hint that a base rate cut may be possible slightly ahead of its own expectations, there is no escaping that at 5.25% it is still at the highest level since 2008. Higher rates, even as they ease over the next year, are still not necessarily reflected in the borrowing costs of many enterprises which have enjoyed lower fixed levels, possibly for many years.

Individuals operating close to the financial edge may face the same fate. Last month 8,708 individuals entered insolvency in England and Wales in March 2024. The 19% fall on February 2024 is clearly encouraging, but personal debt will remain a huge problem: the availability of debt solution options is restricted by the wholesale price of funding these staying ‘sticky’ – slow to fall as base rates eventually ease.

It’s most definitely too early to start singing ‘Happy Days Are Here Again’. Recent falls in insolvencies are coming from a high base and the absolute numbers are still scary. Sure, some businesses will benefit instantly from lower base rates, but most will not and this reality seems to have eluded those feeding surveys on growing business confidence – a feeling apparently based on a perception of medium to long term borrowing costs, not on investment intentions.

Recovery prospects are precarious: international tensions, which will prevail for the foreseeable future, are quick to translate into fuel price spikes and sustained inflationary pressure. That’s never good for companies. Expect CVLs to remain at pre-pandemic levels for the foreseeable future, while company compulsory liquidations will continue to be driven by HMRC, after what’s been a very long period of Covid-related forbearance.

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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