Mid-market businesses sleepwalking into a train crash

Insolvency expert issues warning as company insolvency rates in England & Wales hit eight-year high.

A dramatic spike in company insolvencies in England & Wales is the start, not the peak, of more mid-market business fatalities, with many “sleepwalking into a train crash” under growing financial pressure, according to a leading UK insolvency practitioner.

Latest statistics released by The Insolvency Service show the annual rate of company insolvencies in England & Wales is now the highest it has been in eight years.

In the 12 months to August, a total of 20,512 insolvencies were registered with the Insolvency Service. This is 16% more than any 12-month period since 2019 and 26% higher than any calendar year between 2014-2018.

The number of company insolvencies reported by the Insolvency Service for August was down 9% from the peak in March 2022. But analysis by R3, the trade association for UK insolvency and restructuring professionals, shows the upward trend in the 12 monthly rolling numbers, which started in April 2021, has continued to rise at the same steady pace, and is now 72% higher than a year ago.

Jonathan Amor, insolvency partner at Azets in Yorkshire, predicts this upward trend will continue and is urging business owners to be proactive, with the true impact of the global economic crisis yet to be felt. He says businesses have significantly more options available if they are alert to danger and consult early.

Jonathan Amor said: “The current economic environment, characterised by rising prices and tighter financial conditions, is impacting companies’ ability to service debt. Economists believe it is a case of ‘when’ not ‘if’ the UK eventually falls into recession. And it is highly likely that the cost of business will increase, especially for companies that have taken out non-fixed rate loans.

“Many businesses relied on loans to cope throughout the pandemic, and consecutive interest rate hikes have come at a critical time for many who are already struggling to stay afloat. The mini-budget contained some good news for businesses but these support measures are futile if the cost of borrowing keeps increasing.

“This is the start, not the peak, of more business fatalities. The next 18 months will be extremely challenging, and many businesses are sleepwalking into a train crash. But there are several options available that will reduce risks and ensure a business is ready to take advantage of an upturn – if advice is sought early enough.

“Securing funding from a lender that invests in distressed businesses in exchange for equity would enable the preservation of the business and retention by management of some equity, while avoiding the crystallisation of any personal guarantees they may have entered into. At first blush, this might seem unpalatable to an owner-managed business – but the reality is that a smaller percentage of something is better than 100% of nothing.

“Where management would prefer to retain control of the business, they could apply for a moratorium under the Corporate Insolvency and Governance Act 2020, put together a restructuring plan or propose a company voluntary arrangement, all of which are processes designed to help businesses navigate disruption and emerge stronger.”