Corporate insolvencies on the rise – how can you manage the risks?

The latest insolvency statistics released for June 2022 showed that corporate insolvencies were up by over 40% compared to last year. With almost 1,700 company insolvencies last month, is this the start of the recession that everyone is forecasting?

In truth, this had been on the cards for some time given the backlog from Covid, which explains the rise of 258% in compulsory liquidations. Despite the expected court-related insolvency rise, these numbers are still low. The main increase is in creditor voluntary liquidations (CVL) where it is the directors, usually having taken advice, placing the company into liquidation as their company hits the buffers. In addition, directors are conscious of their fiduciary duties towards creditors and their personal risk if they do nothing. Almost 1,500 of the 1,700 insolvencies were CVLs.

Many directors are only now finding cash flow problems and unsurmountable pressure from creditors. Of course, the build-up of debt, whether to HMRC, the landlord, or a CBILs/Bounce Back loan which has just become repayable, is making matters tough. This has been felt only too well across the leisure and hospitality industry. Difficulties in rising fuel prices, delays with supply, a shortage of staff, and pressing creditors has led to a perfect storm. The Russian invasion of Ukraine, as well as Brexit and Covid, has changed the landscape of business, the margins achievable and the way customers, suppliers and staff behave. This has had a devastating impact on businesses and is a permanent change – businesses must adapt, or they will fail.

Although a company is a separate entity, and in theory, protects a director from personal liability, directors will be wary of the provisions of the Insolvency Act. The Act sets out a very strict test, when insolvent, to act in the best interests of creditors, or risk personal liability if the position of creditors is worsened. In a worst-case scenario, a director’s home may be lost.

It is more important than ever to obtain clear and early advice when faced with business difficulty. As a director, do not be complacent and do not think the worst is over because Covid and Brexit are behind us. They are not and the effects are real – they are now, and action is required to overcome them.

The business recovery and insolvency team at Moore Kingston Smith can discuss these issues in a clear and precise way to provide a direct path forward. Of the solutions found, some will be focused on turnaround and restructuring, but some will require a formal insolvency process and we will be here to give empathy and guidance to all stakeholders at what is a very challenging time.