Directors ‘leaving it far too late’ as UK insolvencies surge

A combination of economic factors, the after-effects of the pandemic, and a widespread complacency from company directors have caused a significant spike in the number of UK insolvencies, market participants have said.

“Directors are leaving it far too late to take the steps needed to save jobs,” said Claire Burden, head of advisory consulting at Evelyn Partners.

“Insolvency is always the last option. Directors should be proactive, taking all action possible.”

Burden also warns of the potential for a “raft of claims against directors” for failing to protect the interests of the company and its creditors.

According to new data published by the Insolvency Service, England and Wales saw a 21% annual rise in the number of company insolvencies in November.

Some 2,029 companies were declared insolvent in November, representing the second-highest monthly data for three years.

‘Heads in the sand’

Andy Davis, strategic advice director of R&I at Azets, also identified director neglect as a prevalent issue. Mid-market business owners must not “bury their heads in the sand”, he said.

“In my experience, a company that recognises the need for advice and support at an early stage will have a wider range of options available to it and a much better prospect of avoiding insolvency.”

Davis argued that liquidations will continue to rise, but believes that businesses can be turned around provided they seek quality restructuring advice.

“Waiting until there is a liquidity crunch is just too late,” he added.

Beyond this, Davis attributed the insolvency spike to the volume of companies facing financial stress, pointing out that the increase is largely being driven by higher Creditors’ Voluntary Liquidations and compulsory liquidations.

“We are already seeing an uptick in the number of companies facing financial pressure, as the obvious impact of inflation, interest rates, input costs and Brexit continue to bite.”

This was echoed by Evelyn Partners’ Burden, who argued that inflationary pressures are failing to be passed onto “already cost-wary consumers”.

“These are good companies but facing serious and continuing increases in energy costs, wage demands and interest rates.

“The vast majority of directors have never before faced these levels of inflation and are having to change their ways of working to assert more control.”

A ‘perfect storm’

In addition to the economic backdrop, a major insolvency driver has been the lifting of the UK government’s temporary “debtor friendly” measures, according to Peter Worrall, restructuring lawyer at Charles Russell Speechlys.

The measures, introduced under the umbrella of the Corporate Insolvency and Governance Act, came into force in June 2020 in response to the pandemic. They included:

• Suspension of serving statutory demands
• Restrictions on winding-up petitions where unpaid debt was caused by the pandemic
• Removing the threat of personally liability for wrongful trading from directors.

For this reason, Worrall argues that it is “unsurprising” that there was a five-fold increase in compulsory liquidations between November 2021 and November 2022.

“Unfortunately, businesses find themselves in a quandary – they need to preserve cash but also shore up the payment pipeline from customers, thus creating somewhat of a perfect storm.

“Unfortunately, the present outlook is not all that rosy and UK insolvencies, particularly compulsory liquidations, are expected to increase in the short term.”