In the years since the Covid-19 pandemic, many businesses have struggled to weather tough times. Prolonged closures and disruptions during the pandemic followed by the cost of living crisis and sustained inflation are taking a toll on businesses across the board.
And an increasing number of companies are facing the worst-case scenario this year: insolvency.
When a business becomes insolvent, it means it cannot repay debts when they’re due – either due to a lack of cash or because the business has more liabilities than assets on its balance sheet.
In December 2023, according to data from the government’s Insolvency Service, 2,002 registered companies went into insolvency in England and Wales – 2% higher than the same month the previous year. In Northern Ireland, there were 25 insolvencies – up by 67% but in Scotland, the picture was slightly more positive, with a 5% drop in insolvencies – ‘only’ 108 registered in total. The overall number of insolvencies surpassed levels seen both before and during the pandemic when government support was available.
The number of business insolvencies in England and Wales in the third quarter of 2023 was 2% lower than in the second quarter of 2023, but 10% higher than a year ago. What’s more alarming, though, is that those two quarters saw the highest quarterly insolvency numbers since the second quarter of 2009, the Insolvency Service reported.
“Firms have been battling economic issues for three and a half years now, and corporate insolvency numbers are rising as more and more directors run out of options,” said Nicky Fisher, president of R3, the UK’s insolvency and restructuring trade body, in a press statement.
Fisher added that companies are “being battered from all sides”, thanks to higher everyday costs, demand for stronger wages and a downturn in consumer spending as more people try to save money amid high inflation.
Fisher’s words of caution track analysts’ forecasts for 2024.
In a recent analysis, independent economic consultancy firm Cebr said it expects the rate of business insolvencies to stay elevated into 2024, noting “there could be 7,000 insolvencies per quarter on average across 2024”.
When to take action for your business
Business owners or directors shouldn’t wait until their business is on the brink of failure to seek out help. By then, avoiding insolvency may be much harder.
“If you run a small business, it is important to regularly review the solvency of your business and cash-flow forecasts. These will help identify any potentially difficult periods and give you the opportunity to put in place a plan to deal with them,” Nicholas Hardman, team manager at Business Debtline, a free debt advice service for the self-employed and small business owners, said in an email to NerdWallet. The charity is run by the Money Advice Trust.
Fisher advises business leaders to watch for signs of financial distress, such as cash-flow hiccups, a surplus in stock or inventory and delays in paying bills, such as the company’s rent, taxes or vendor invoices.
“[These] are all signs that a business is distressed and need to be acted upon before they get any worse – and while the business has as wide a range of potential solutions open to it as possible,” Fisher said in the press statement.
Hardman agrees, noting that business owners should look for ways to cut spending and increase their business income.
“Having a comprehensive budget, knowing exactly what you have coming in and going out for both your business and household budget is crucial,” Hardman said. “This will help you identify any debts and how to reduce non-essential spending.”
“Identify urgent business debts that need to be tackled first, including mortgage, rent or lease arrears”, Hardman advises.
Options to avoid business insolvency
Here’s a look at various schemes business owners and directors can consider to help their businesses avoid going bust.
Informal agreement with creditors. A first option is talking to your company’s creditors to see if they’ll informally agree to a payment plan that enables your firm to catch up on debt payments. This scheme is not legally binding, though, and makes most sense if a company is experiencing temporary financial challenges and none of the firm’s creditors are sending your account to collections or seeking a court judgment. Find out if any additional charges are involved in adjusting your repayment terms.
Company voluntary arrangement (CVA). In a CVA, which typically lasts for three to five years, a company’s debts are structured to give a pre-agreed upon portion of money each month to the firm’s creditors. This binding agreement is ideal for companies that have a viable future.
Company restructuring plan. This avenue might include the sale of certain business assets to ease financial stress. However, the firm might have to consider layoffs in the process.
Administration. In this set-up, a company is handed over to an insolvency practitioner who acts as an administrator. While in charge, the administrator ensures your creditors can’t take legal action to recover their debts or start liquidation proceedings without court consent. The administrator also will propose how the company can become profitable, settle on a repayment schedule with creditors, sell the business to recoup some money versus a liquidation and other courses of action.
Administrative receivership. A receivership is a non-legal arrangement in which a holder of a floating charge, usually a bank, selects an administrative receiver to recover money from the company. An administrative receiver is typically a private, third party insolvency practitioner who is not the official receiver. The receiver doesn’t make payments to unsecured creditors, such as credit companies or personal loans. An administrative receiver does not make payments to unsecured creditors.
Liquidation or winding up. If there is no way to get back on track financially, a company may need to consider liquidation to close its business. Liquidation legally culminates operations of a limited company. In liquidation, a company stops conducting business and being an employer. A liquidated company also is removed from the business register at Companies House.
Next steps
Before taking action, it’s best to get counsel from a professional.
The Insolvency Service recommends contacting a qualified solicitor, accountant, authorised insolvency practitioner or financial adviser as a first move. Most of these professionals will charge a fee for their services, which varies.
For free help, Business Debtline provides advice and tools to help people manage their business finances and navigate difficult times.
The Insolvency Service provides a free helpline at 0300 678 0015, which is open from 9am to 5pm, Monday to Thursday, and 9am to 3pm on Friday. The Insolvency Service can offer details about processes it regulates, including bankruptcy, debt relief orders and company liquidations.
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