Weak consumer demand, pressure on household budgets and a range of economic uncertainties have all contributed to a ten per cent year-on-year rise in corporate insolvencies across the UK.
New figures from the Insolvency Service have revealed that, excluding bulk insolvencies, 16,090 businesses entered insolvency in 2018, the highest recorded annual figure since 2014.
And Andrew Haslam, North East chair of insolvency and restructuring body R3, believes that a further rise is likely to follow this year in the light of prevailing economic challenges.
Research by R3 found that the proportion of North East firms across all business sectors with a raised risk of entering insolvency in the next 12 months rose from 35% in January 2018 to 42% this month.
Andrew Haslam, who is also head of specialist business advisory firm FRP Advisory LLP’s Newcastle office, says: “R3’s North East members reported that demand for their services, from advice on turnaround and restructuring processes to formal insolvency procedures, increased right through 2019, and this has carried over into the start of the new year.
“After three years of relatively flat numbers, 2018 saw insolvencies creep back up to levels last seen in 2014, and the pressure point for businesses most frequently cited by our members is weak consumer demand.
“Although recent government figures showed that the weekly amount spent by households has hit its highest level since 2005, much of that expenditure went on housing and transport, with less left over for consumer outlay.
“This is having a big impact on consumer-facing businesses, such as retailers and the restaurant sector, and also spells bad news for businesses at one remove from the consumer, such as manufacturers supplying consumer products, shop fitters, or logistics firms.
“R3 research last year also found that one in four UK companies had taken a financial hit following the insolvency of a supplier, customer or debtor in the previous six months, which clearly illustrates the reach and impact of the ‘domino effect’ of one struggling business often affecting the fortunes of others.
The potential impact of pressures on government spending and the decision take last year to partially restore HMRC’s ‘preferred creditor’ status in cases of corporate insolvency, thus giving it a priority claim on the assets of an insolvent company, have also been highlighted by R3 as areas of potential concern.
Andrew Haslam continues: “A particular area to watch in 2019 will be public service provision as businesses, social enterprises and charities in the health and education sectors are being hit by a double whammy.
“Government funding or subsidies are being cut, while these sectors are also expected to pick up the slack for work that the public sector doesn’t have the resource to carry out anymore.
“Government proposals to give itself priority status for repayments in insolvencies may well have a negative impact on the ability of small businesses to finance themselves this year. With uncertainty in the supply chain, many businesses will be seeking to increase their stock levels to counteract this and will require new finance to do so. But if funders are concerned that the Government will take a bigger cut if things go wrong, then lending decisions become much harder.
“We would strongly encourage directors of companies which are finding current market conditions tough to seek out knowledgeable and qualified advice from a professional source as the earlier a company does so, the more options it will have to put things right again.”