Why has there been a rise in corporate insolvencies in the U.K.?
The latest statistics, from the Insolvency Service, show that corporate insolvencies are up year on year, with 2018 having shown the highest number of insolvency cases since 2009. Creditors Voluntary Liquidations (CVLs) represent the most common form of corporate insolvency, accounting for almost 70 per cent of total company insolvencies, excluding bulk insolvencies. There are a number of underlying factors that have contributed to the increase of insolvencies in the U.K. in the present climate.
The effects of Brexit on business in the U.K. have become a key factor contributing to the increase in insolvencies. Indeed, the uncertainty that surrounds the potential effects of Brexit has meant that it is difficult to judge what the economic landscape in the near future is likely to be. For this reason, business owners are inclined to postpone any big investment decisions until matters become clearer. This is progressively having detrimental impact on smaller companies further down the supply chain. In the short-term, more and more business owners are finding that they have to try to slim down their companies by cutting costs in order to make them more viable. Until there is a greater certainty about Britain’s future, businesses will continue to suffer.
The increase in minimum wage and living wage, as well as employer pension contributions has meant that the payroll of businesses, which is generally the largest cost, is increasing. Alongside this, the increase in business rates has created pressures. Businesses that import have found that the adverse change in the exchange rates have meant that they are typically paying more for imported goods, which again is a cost pressure within a huge number of businesses. All of these factors are causing businesses to return lower levels of profitability and business owners and directors have been obliged to consider how they can adjust the structure of the business to remain viable.
Research from R3, the insolvency and restructuring body, found that one in four companies in the U.K. had taken a financial hit following the insolvency of a supplier, customer or debtor in the previous six months, illustrating the reach and impact of the ‘domino effect’ of one struggling business negatively impacting the fortune of others around it.
The high street is not the only area being hit with insolvencies, although these names are the ones most often seen in the headlines. The number of construction firms in the U.K. becoming insolvent increased by 20 per cent in 2018 and was the worst affected sector in 2018. A total 2,954 companies collapsed in this industry in 2018. Carillion, the second largest building firm in the U.K., entered compulsory liquidation in January 2018 after its stock market value slumped by 90% and it had racked up debts in excess of £1 billion.
