Business insolvencies in England and Wales rocket 40%

Business insolvencies in England and Wales rose by 40 percent in the year to May, new government data shows.

According to the Insolvency Service, about 2,552 companies were declared insolvent in May, up from 1,825 a year ago and the highest number since records began in January 2019.

They’re also up from the previous month, when 1,688 insolvencies were recorded, with experts expecting them to rise further as companies face higher debt servicing costs due to rising interest rates.

The number of insolvencies was higher than the level during the government’s support measures during the pandemic, and also higher than before Covid-19.

Most insolvencies were voluntary liquidations (CVLs) of creditors, where a company’s directors, after exhausting all recovery options, decided to liquidate the company without a formal court order. They rose 38 percent to 2,181.

There were also 189 forced liquidations, 34 percent more than in May 2022, when businesses collapsed under the pressure of rising costs and higher interest rates.

Mandatory liquidations are when a formal court order is filed, normally by a creditor, stating that the company owes an amount of money that it cannot pay.

“The number of forced liquidations has risen from historic lows during the coronavirus pandemic, partly due to an increase in the number of liquidation requests submitted by HMRC,” the report explains.

Britain’s insolvency rate was low during the pandemic due to an £80bn business lending program and a temporary curtailment of court liquidations.

Since then, however, the numbers have risen, peaking in 13 years in the last quarter of 2022 and remaining close to that level in the first quarter of 2023.

Nick O’Reilly, director of restructuring and recovery at MHA, blames the rise in insolvencies on a lack of due diligence on the government’s Covid loan.

He says the majority of companies now coming under administration are the ones that would have gone out of business anyway if Covid never happened and they hadn’t gotten support.

Insolvencies increased by 40% in the year to May, mainly due to a higher number of CVLs

“The UK is suffering the fallout from the government’s reckless covid-19 lending scheme, which is now bankrupting a greater number of businesses that were previously supported by government borrowing during the pandemic,” he added.

“The government’s business interruption loan and future funds schemes should have served companies that were able to survive and had sufficient cash reserves.

“Instead, loans were made to anyone who asked, regardless of whether they could pay them back.

“Three years after the pandemic began, high inflation, depressing energy prices and low consumer confidence have prevented millions of businesses from recovering, and many are now facing the wall.”

O’Reilly believes that in the current difficult economic climate, insolvencies and administrations will remain high “at least until 2024.”

David Kelly, head of insolvency at accountants PwC, also thinks insolvencies will continue to rise in the second half of the year.

PwC said construction and retail were the hardest hit sectors and the number of troubled food producers was also on the rise.

About 99 per cent of liquidations involved companies with an annual turnover of less than £1 million.

Businesses and consumers have been hit hard in the past year by a sharp increase in energy and food costs, and most companies are now experiencing higher labor costs as well.

Total profit margins outside the oil and gas sector had not increased by the end of 2022, according to official data.

Borrowing costs are also rising sharply as the Bank of England raised interest rates from 1% a year ago to 4.5% and is expected to raise rates again next week as consumer price inflation remains high at 8.7% in April .

Lindsey Cooper, partner at RSM UK Restructuring Advisory, said: ‘With interest rates continuing to rise, it is becoming increasingly difficult for some companies to refinance and we expect more bankruptcies among companies already in a vulnerable cash position.’

In contrast to the situation for companies, individual insolvencies in May were similar to pre-pandemic levels.