creditcontrol.co.uk
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Creditor enforcement rising as insolvency stats drop
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The monthly insolvency statistics from the Insolvency Service really have been all over the place, defying even the most dedicated attempts at identifying meaningful trends. August’s national total of 2,006 failures was the third lowest this year. It was the second month in a row when the total fell – the first time this has occurred in the past 12 months. The peak so far for 2024 was 2,474 in June.
August 2024 was 18% down compared to August 2023, but still 37% above pre-pandemic levels in August 2019. On a rolling 12-month basis, August 2024’s 26,702 insolvencies were up 4% on 2023 and 45% on immediately pre-pandemic in February 2020.
Statistics for August may be showing yet another swerve in the insolvency road, but beware warns Nick Hood, Senior Business Adviser at the Opus Business Advisory Group creditor enforcement is on the rise.
“Looking at overall numbers for company insolvencies is interesting, but the real stories lie in what is happening with the various types of insolvency: business rescues through Administrations and Company Voluntary Arrangements (CVAs) compared to burials through Liquidations and as between the two types of Liquidation (Creditor’s Voluntary and Compulsory).”
“The disappointing news is that Administrations and CVAs continue to languish at all time lows, making up just 7% of insolvencies in the year to August 2024. Before the pandemic they were 12%, which was broadly the level every year back to the global financial crisis. The small increase seen earlier this year has not been sustained.”
“This is most likely a reflection of the subdued economic background and the amount of damage wrought to SMEs by the pandemic, Ukraine-linked supply chain disruption, soaring materials input and labour costs, and two years of high interest rates, making them impossible to rescue.”
“Liquidation is now the route for 93% of failures, but within that overall statistic there is a clear shift away from director-initiated Creditor’s Voluntary Liquidations towards creditor-enforced Compulsory Liquidations, which is not good news for businesses struggling to manage their debts.”
“Back before the pandemic moved a whole lot of commercial goalposts, Compulsory Liquidations (imposed by creditors on insolvent companies through the Court) made up 20% of business failures. Further back still and before the global financial crisis, they represented a third of insolvencies.”
“When the government intervened to protect struggling businesses during the pandemic by severely restricting creditor enforcement action, Compulsory Liquidations plummeted. They were just 4% of insolvencies in 2021 and 10% in 2022.”
“Then in 2023, something started to stir in the debt collection jungle. Creditor action pushed 13% of failed companies into Court and thence onwards over the financial cliff. Now in 2024, this percentage has edged up again, this time to 14%.”
“The precursor to Compulsory Liquidation, the issuing of a Winding Up Petition (WUP) by an unpaid creditor has soared in 2024. In Q1 2024, petitions were 17% up on Q1 2023. In April 2024, they were 44% ahead of the figure for April 2023.”
“By far the largest player in this process is HMRC, which is taking an increasingly hard line over tax arrears following the long period of government-prompted indulgence during the pandemic. WUPs initiated by HMRC were up 350% in 2023, compared to 2022. The ban on issuing WUPs up to March 2022 under Covid 19 restrictions will account for some of this huge increase, but certainly not all of it.”
“Another factor behind rising Compulsory Liquidations will be the aftermath of the widespread abuse of the Covid 19 government-backed loan schemes, the investigation and punishment of which is very much an ongoing process.”
“The takeaway from the August insolvency statistics is that we might just have seen the peak of failures earlier this year, but the proactive management of payables and other liabilities must be a priority, especially where there are substantial arrears owed to HMRC. It seems that the era of patience and understanding by creditors is over.”
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