Is the UK falling out of love with business rescue culture?
August 29, 2023
When the corporate insolvency statistics for July 2023 were released by the Insolvency Service, all the focus by commentators was on the macro aspects of the numbers. Insolvencies for the whole of the UK totalled 1,837, a slight dip of 4% from July 2022 but still well ahead of July 2019 when failures were 18% lower. Cumulatively for the first seven months of 2023, the picture is a little less positive, with the 14,895 insolvencies up 13% on 2022 and 35% on pre-pandemic in 2019.
The closest to any detailed analysis of these figures in the media has highlighted the continuing domination of Company Voluntary Liquidations (CVLs) at 81% of all failures, with the continuing narrative that entrepreneurs were losing the battle to survive and were still succumbing to battle fatigue by closing their businesses. Sadly, there’s little prospect of any positive outcome from these corporate burials, especially for unsecured creditors, staff and other stakeholders like landlords. So what has changed over time to make business rescue culture undesirable?
Why so few Administrations?
Back in the chaotic days following the global financial crisis, 16% of insolvencies went down the Administration route. In 2009, there were 4,167 Administrations. So far in 2023 there have been just 898 (6%) in a year which looks very likely to have the second highest number of corporate insolvencies in history – at present it looks like there could be more than 25,000 failures.
The factors underlying the Administration drought are hotly debated. The stagnant performance of the UK economy certainly won’t encourage investors, nor will the structural disruption caused by the pandemic and the cost of living crisis to some industries like retail, travel, or hospitality. Uncertain business and asset valuations also don’t help. In the past, many larger Administrations have seen involvement from the private equity sector, which has been facing challenges of its own as rising interest rates have caused problems with high-leverage legacy deals involving low-margin businesses.
What about the wider M&A market?
The UK M&A market had a mixed start to 2023, with deal volumes showing strength but with values shifting to the smaller side. There were 483 transactions in Q1 2023, up 13% on the previous quarter and remaining well above pre-pandemic levels. On the downside, value continued to slump, falling by 31% quarter-on-quarter to £17.5 billion, a low not seen since Q2 2016.
Solvent corporate restructurings
It may be that some of the resources, which might otherwise be available for distressed M&A are being diverted into taking advantage of an anticipated surge in divestment activity in non-core European and UK businesses by corporates in 2023.
According to a recent survey conducted by alternative investment firm Aurelius, some 78% of respondents anticipated an increase in such disposal activity this year. Among the respondents, 84% believed that a need to refocus on core operations would be the key driver, while 45% saw the reduction of debt burdens and 43% identified the need to reorientate a business from a weak market position as important factors.
Additionally, environmental, social and governance issues are expected to continue to drive deal activity, despite the widespread debate about the realities of ESG investing. There have been examples of investors carving ESG-related assets out of corporate balance sheets. In February 2023, DIF Capital Partners and German construction company, ib vogt, acquired a major solar and battery project portfolio in the UK from Enso Green Holdings.
Has the reputation of Administration process been damaged by its abuse?
There have always been and always will be suggestions that Administration is too convenient a route for breaking up a business behind a protective legal screen and without the inconvenience of the creditor involvement or interference, which comes with a CVL. The frequent use in Administrations of the pre-pack sale strategy lends weight to these suspicions, despite ongoing efforts to hold those involved to accountable for their decisions.
Will Administration filings continue to languish?
If there is a successful outcome to the Wilko insolvency, interest in Administration as a rescue tool for badly damaged but worthwhile businesses might revive. This is the largest UK retail failure since the collapse of Philip Green’s empire and then back to the demise of Woolworths in 2008.
It will be unfortunate if Administration continues to make up such a small part of the insolvency landscape. It is a well-honed rescue tool, which has been used to preserve many businesses (if not necessarily the companies that owned them) and save countless jobs – a positive contribution to the economy that no amount of Compulsory or Voluntary Liquidations will ever achieve.
If you are a business owner that is looking for professional advice, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.