The surge in corporate insolvencies for November 2023 announced by The Insolvency Service has left the UK economy on the cusp of an unwanted and deeply unenvious record. It looks increasingly as though there will be a record number of company failures in 2023, eclipsing the previous high of 26,556 at the height of the global financial crisis in 2009.
The corporate insolvency position at the end of November 2023
Across all the nations within the UK, there were 2,601 corporate insolvencies in November, which was 20% up on November 2022 and a remarkable 60% higher than pre-pandemic in November 2019. Looking at the cumulative position for the eleven months to the end of November, there had been 24,460 failures, a rise of 15% on 2022 and 41% for 2019.
What could the full year total for corporate insolvencies be?
A simple mathematical extrapolation from the November position takes the potential annual total for 2023 to 26,684. December is a difficult month to predict for insolvencies because of the disruption caused by the festive season, but there are severe and sustained pressures on certain sectors, such as retail and hospitality. The probability is that there will be a new record when the full year numbers are announced in the New Year.
The explosion in Creditors’ Voluntary Liquidations
The most noticeable feature of this year’s business failures is the sharp rise in CVLs, which are up a whopping 86% over pre-pandemic levels in 2019 and now represent 80% of insolvencies, compared to only 67% in 2019.
This indicates that the core business insolvency issue in 2023 is not aggressive creditor enforcement, which would show itself in a rise in Compulsory Winding Ups through the courts. They are actually lower in 2023 (3,119) compared to 2019. What we are seeing is owners and managers recognising that their businesses have no future even with a business rescue or restructuring plan and instead calling a halt while they are still in control.
What lies behind the rise in CVLs?
The theory that higher CVL numbers reflect the damage done to whole sectors and tens of thousands of previously viable businesses within them by Covid-related restrictions may well have been valid in 2022, when CVLs were an even higher percentage (84%) of total failures. Almost four years on from the start of the pandemic, it is much more likely now that the continuing rise in CVLs is down to more recent economic factors.
In particular, entrepreneurs are grappling with negative impacts right across their business models. They are facing more cautious consumer spending because of the cost of living crisis, lower profits margins because of input cost inflation, higher overheads especially from energy costs, staff pay rises, the tight labour market denying them the workforce they need and sharply higher interest costs on their borrowings. For some this translates into insoluble cash flow challenges, a lack of profitability and ultimately, an unviable company.
What about business rescues?
With so many companies in financial difficulty, the normal expectation would be that business rescues and turnarounds carried out through the Administration route would have risen at least to some extent, if not to the same degree as CVLs. Yet, the reverse is true: there have only been 1,576 Administrations to date in 2023, compared to 1,769 in 2019 and the percentage of total insolvencies for this process has dropped sharply from 10% in 2019 to just 6% now.
This may be the product of a lack of funding from traditional sources for rescues in the aftermath of the pandemic, which has distorted historic financial data and made forecasting the future extremely difficult. It could also stem from the reduction in asset values in entities whose business models have been altered by the pandemic. It might also reflect the impact of higher interest rates on the potential returns for investors who specialise in buying distressed assets and businesses.
Will 2024 be better or worse for corporate insolvencies?
The trade credit insurance specialists, Atradius published their latest forecast for global insolvency trends in September 2023, predicting that the UK business failure trend will stabilise in 2024 but there will still be an increase of 5%, which would push next year’s insolvency number up towards 28,000.
The prospects for the UK economy remain uncertain, with a clear division between optimists like the Chancellor talking of it having ‘turned a corner’, while many other pundits see a mild recession as the most likely outcome. The Bank of England Governor seems to be an outlier, going public with a comment that the economic conditions were the worst he had seen.
One thing is clear for those who run businesses and those who lend to them or supply them. They will need to be cautious in the times ahead, prudent with their cashflow and conduct thorough due diligence, whilst also not ignoring the opportunities that can arise through such times.
If you are seeking professional advice for your business, 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.