Insight 37 - Magazine - Page 36
LEGAL MATTERS
Why are Business
Insolvencies on the Rise?
longer viable. In these circumstances, the
confidence and optimism that helps to
grow companies can actually work against
them.
Not only are some businesses still coming
to terms with high interest rates, but some
are still coming to terms with previous
shocks, such as the impact of Covid and
inflation. This also means there is little
sign of any respite. Even if underlying
economic conditions improve, existing
factors will take time to work their way
through.
N
at Young, Partner specialising
in insolvency and dispute
resolution, explains the current
increase in liquidation.
Total company insolvencies are now
at their highest since the credit crunch
in 2009 with an increase in corporate
insolvency over the last two quarters.
Startling to note is that voluntary
liquidations are at their highest since
records began, more than 60 years ago.
Meanwhile, the business ‘birth rate’
dropped below the ‘death rate’ in 2022.
Are global events part of the problem?
This has certainly been an eventful period.
Brexit was followed by the pandemic,
followed by Russia’s invasion of Ukraine,
which in turn led to high energy prices
and soaring inflation across the globe.
Significant disruptions never pass by
unnoticed. However, it is still interesting to
ask why the rise has happened now. The
pandemic has passed, energy prices have
stabilised, and recent months have seen
inflation ease.
What is the main reason?
In my opinion, this is the effect of rising
interest rates, which have shot up as fast
as they dropped following the credit
crunch. For many years, debt finance costs
were low, so even marginally profitable
36
ventures were viable. This was the era of
the zombie business: heavily indebted
and unviable by historic standards, but
still officially undead. The scope of Covid
support exacerbated this trend - with
credit offered on uncommercial terms,
there was no reason to close.
Higher interest rates have once again
imposed financial discipline on
businesses. Since funding working capital
is expensive, cash generation has regained
its importance. There is no doubt that
borrowing costs (and therefore interest
rates) are behind many of the recent
insolvencies.
Why are voluntary liquidations so high?
Higher rates of return on cash mean that
owning marginally profitable businesses is
no longer appealing. Business owners are
not simply being forced into insolvency.
They are choosing to close their
companies to focus on more profitable
ventures. Seen in this light, the rise is
perhaps less alarming.
Is this just a short term blip?
Unfortunately, directors are notoriously
bad at identifying when their companies
are insolvent, and often seek advice
far later than they should. Many simply
hope that something will turn up, even
when it is obvious their business is no
bIZ4BIZ INSIGHT MAGAZINE | FEBRUARY 2024
Faced with tough conditions, what
should business owners do?
Unfortunately, there is no easy answer.
Even well-run and successful businesses
fall victim to circumstances outside
management’s control.
However, you should ensure you have
adequate and timely management
accounts so you can spot problems before
they become too large to solve. You need
to be realistic and objective about the
prospects for your business.
Finally, don’t forget to seek professional
advice – that way you understand the risks
of action – and inaction.
Nat Young
Partner specialising in Insolvency
and Dispute Resolution
www.longmores.law
enquiries@longmores.law
01992 300333