Lynne Darcey Quigley on why corporate insolvencies will spike

16 November 2021 Consultancy.uk 5 min. read
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The number of corporate insolvencies is about to erupt, but what is truly going on behind the increase? Lynne Darcey Quigley from commercial debt recovery advisory firm Darcey Quigley & Co discusses the sharp rise and outlines how corporations can mitigate the risk.

In 2022, global corporate insolvency numbers are expected to increase by 33%, returning to levels not seen since before the pandemic began. In fact, professional services firm Deloitte estimates that they could be even higher. In 2009, during the global financial crisis, the figure was 60% less. But what does that mean for corporates today, and is there any way of halting the landslide?

In the UK, we are beginning to see corporate insolvencies increase significantly, and this is largely down to several factors. In September 2021, the UK government released its insolvency statistics, and these showed that the number of registered company insolvencies was 56% higher than September the previous year. It was the most significant number of businesses failing since before the pandemic.

Lynne Darcey Quigley, CEO, Darcey Quigley & Co

Yet, the worst is to come. With statistics rising dramatically, why are we beginning to see this spike happening now? It would appear to be a combination of different factors which has pushed struggling businesses over the edge.

Lifting of the temporary ban on winding-up petitions
The ban on winding up petitions was meant to ease the burden for SMEs. During this time, it meant that no creditor could present a petition against a debtor company. The ban was then temporarily extended to 30th September, which meant that any winding up petitions could be put forward to courts again.

However, the outstanding debt had to be worth at least £10,000, which meant that there was still a degree of protection to businesses that owed commercial payment.

The lifting of the ban then increased the number of insolvencies, which will rise further when the £10,000 threshold is taken away.

Removal of fiscal support from the government
We had seen this perfect storm approaching. We had previously been aware of the incoming spike in insolvencies which had been impacted by the backlog of "normal run-rate" insolvencies from Q2 and Q3 2020, and of course, that is only beginning to hit now.

The government brought in several measures to try and protect the economy against the pandemic – by bringing in furlough, CBILs/CLBILs/Bounce Back Loans as well as the rates relief combined with the ban on winding up petitions. Together, these were life support keeping businesses alive; however, it is quite possible that they merely extended the life of such companies by staving off the inevitable.

Now that the Government's financial support has ended, the companies reliant on this will continue to struggle, thus contributing to the rise in insolvencies.

Supply chain bottlenecks
The issues with supply chain networks have been well documented in the media in recent months. Alongside rising costs in fuel and panic buying at the pumps, acute scarcity of raw materials and goods has resulted in extended wait times and increases in overall prices.

As a result, longer lead times for goods and price rises have directly impacted the increase in late payments, where suppliers and businesses have felt the need to rein in outgoings. In turn, this has resulted in overall outstanding growth of 20% in just one year.

If there is a lack of floating funds available to an SME caught up in the bottleneck, the extended periods waiting for payment can be catastrophic, not to mention the knock-on effect such a tightening of moveable funds can have on corporate insolvencies.

Contractors and freelancers are particularly exposed to the risk of shortages and increased prices as they often must absorb these changes themselves if they have already agreed with terms on a contract.

Covid-19’s Delta variant
The rapid spread of the Delta variant of Covid-19 extended and worsened the economic fallout of the pandemic. The ONS reported a smaller than expected growth of 0.1% GDP in July and modest growth of 0.4% in August.

The most recent data also shows that the construction industry contracted output down by 0.2%, now 1.5% below its pre-pandemic level. The sector contracted for three months straight. In the UK, the construction industry makes up 13% of the total number of companies and employs over 9% of the workforce, around 3.1 million people.

Subsequently, any downturn in the market (which then leads to insolvencies in the construction industry) can have a knock-on effect on hundreds of businesses and contractors. All it takes is one noticeably big player in the industry to collapse, and tens of other companies can go insolvent as a result.

The impact on businesses

So, looking ahead, what impact will this spike in corporate insolvencies have on businesses in 2022? Of course, not every business will be at risk of becoming insolvent. But that is not the only threat businesses face.

With so many businesses being at risk of insolvency, it poses intense pressure on the credit cycle. For example, if a business goes insolvent, it will not pay any outstanding invoices they have. The company that is owed money will lose what they are owed, which puts strain on them. This company will also have invoices to pay and may have been relying on the insolvent company being able to pay. And so on.

Given the economic uncertainty we face, businesses must mitigate their credit risk and protect themselves. There is one way they can start now to reduce the risk of going under.

If your company is owed money for outstanding commercial invoices, it is essential to take action before the waves of corporate insolvencies hit. If invoices are left too late, the chances of recovering the total amount are significantly reduced. Understand your limitations, move onto cloud-based accountancy for your cash flow, and above all, chase invoices immediately and ask for a debt recovery company to help if it gets too much.