Number of corporate insolvencies rises as support measures unwind

The number of corporate insolvencies seen across the UK rose by 26% in the third quarter of 2021. According to new research, worse could be to come, as inflation and supply-chain pressures bite in the absence of government Covid-19 support measures.

Despite the continued financial crisis seen during the pandemic, the number of administrations and receiverships initially plummeted during 2021. Interpath Advisory found that a total of 301 companies fell into administration or receivership from January to June 2021 – down from 655 in the first half of 2020 or 686 in the same period of 2019.

The fact that during its deepest recession in three centuries, the UK was seeing fewer insolvencies, suggested the £80 billion of emergency government-backed loans received by UK businesses during the Covid-19 crisis have kept a huge number of firms on life-support.

With government measures such as the furlough scheme having now closed, the UK has indeed seen a rise in insolvencies – though not by as much as some economists anticipated. Analysis of notices in The Gazette by Interpath Advisory reveals that a total of 155 companies fell into administration or receivership from July to September 2021. While this is up from 123 in the second quarter of 2021, it is still far fewer than the 243 seen during the same period in 2020, and still at only 39% of pre-Covid-19 levels, when compared to the 401 appointments of administrators in the third quarter of 2019.

With that being said, the future forecast is looking increasingly bleak, according to Interpath Advisory’s CEO, Blair Nimmo. While support measures tailing off may be behind many of the insolvencies currently being seen, growing uncertainty around the global supply chain are only just starting to bite.

Nimmo noted, “Against a backdrop of rising inflation costs and lessening government support, there are signs that the level of insolvencies are beginning to rise. We are yet to see the deluge of corporate failures that many anticipated but, whilst the outlook remains uncertain, I would expect to see filings continue to escalate, with more momentum gathering into the New Year.”

Perhaps as a sign of what is to come, the construction and energy sectors saw the largest rise in levels of administrations and receiverships in the last quarter. The energy sector has directly been stung by recent spikes in wholesale gas, coal and electricity prices to unprecedented highs – pushing nine UK energy firms to administration in recent months. Following on, energy intensive industries like the manufacturing sector have suffered a knock-on consequence of this, while in the case of the construction sector it has compounded other pressures.

With the price of raw materials spiralling amid the UK’s strained import relations, 34 firms in construction appointed administrators over the three months in question.

Nimmo noted, “This is another sector that feels on the brink of a perfect storm. Raw material costs remain at high levels, with steel, timber and plastic products nearly 50% higher than they were pre-April 2020. [Meanwhile] the UK’s timber supply is impacted by both transport and Brexit-related constraints, and the construction industry is navigating a range of other issues including wage inflation, haulage labour shortages, reverse charge VAT implications, and wider instability in the global shipping industry. The knock-on effect is a stop-start situation for many construction projects, which in turn is resulting in inefficient resource allocation and downtime, creating further pressure.”

With “no end in sight” to this instability, Nimmo stressed the importance of effective business planning. For example, energy-intensive businesses need to swiftly weigh up whether to switch suppliers, or deploy broader cost reduction programmes, or hedging strategies, to combat price volatility. The situation is not without hope, though.

Nimmo concluded, “The good news is that, despite these challenges, the UK and devolved governments remain supportive, with increased infrastructure spending and commitments to new projects. Suppliers of debt capital are also continuing to provide support to businesses to help them trade through the impacts of Covid-19 and Brexit.”