Azets responds to latest insolvency figures

With 5.9% more corporate insolvencies than last August according to Government insolvency figures, Jonathan Amor, Restructuring Partner at international accountancy and business advisory group Azets, has advised that getting advice when a business first shows signs of financial distress gives the firm more options, a better chance of securing rescue finance, and a greater likelihood of improving its situation.

The main driver of the monthly fall in corporate insolvencies has been a reduction in the number of compulsory liquidations and administrations. August’s insolvency numbers are still higher than they were this time last year, and this reflects the continued pressure businesses are under after years of contracting margins, rising expenses and a challenging economic backdrop.  

Companies are under pressure to cut costs wherever they can, but the reality is that they’ve been having to do that since the end of the pandemic. Since late 2021, firms have had to deal with increased creditor pressure, Covid debt repayments, customers cutting back spending, increased inflation, rising prices for materials and goods, a more aggressive approach to debt recovery from HMRC, and a rising burden from taxes.  

All of these have increased costs and led to significantly higher levels of corporate insolvencies compared to pre-pandemic figures – and given the ongoing issues businesses face with costs and shrinking margins, changes in UK tax policy making it more expensive to recruit and retain staff, national economic and geopolitical issues, and high interest rates affecting borrowing and debt, the business climate remains stormy.  

It would be no surprise, given this and given the increase in requests for advice and support the market has seen recently, if insolvency numbers rose compared to last year and in the coming months. Our SME clients are showing remarkable resilience in a challenging market, but the latest statistics and the current national and global political and economic issues make it hard to be very optimistic about the short-term prospects for the wider SME community.   

The positive news is that there is still capital available to invest in UK businesses, but management teams who want to use this as a lifeline need to do so while the business is still viable, and engage with lenders as early as possible.   

The Government is well aware of the issues, the challenging business climate and the impact it’s having on the business community, and we hope future policy announcements won’t exacerbate the situation. The Chancellor has to walk a difficult line between balancing the books and putting businesses under further financial pressure at the Budget in November, and hopefully she’ll be able to find means of achieving the former without creating the latter.  

While it’s disappointing that access to the Restructuring Plan has been limited for SMEs, the reality is that the costs associated with meeting the high standard of analysis the Courts quite correctly require from those looking to enter this process make it hard for smaller businesses to enter one.  

There is a wealth of alternative options available for firms of this size – and, of course, a Company Voluntary Arrangement (CVA) remains very much accessible to those insolvent SMEs who have the potential to be rescued and return to profitability. However, I would hope that a mechanism can be found to reward those creditors who are forced to accept CVA proposals from the new levels of enterprise value created by the process.  

The market remains tough, but the key action any director or management team of a struggling business can take is to seek advice at the earliest possible time. It’s an incredibly hard conversation to have, but starting it when a business first shows signs of financial distress gives the firm more options, a better chance of securing rescue finance, and a greater likelihood of improving its situation than if its management team had waited until things had become more serious.