Insolvency statistics from the first quarter of the year have raised concerns that larger companies could begin to be impacted by high levels of distress among small businesses. These concerns come as new figures show that insolvencies remained close to a 13-year high in Q1 2023.
During the first quarter of the year, 5,747 companies were declared insolvent in England and Wales. The figure was 18 per cent higher than the same period a year earlier and close to the 5,969 insolvencies recorded in Q4 2022, the highest figure since 2009.
So far, this has remained largely confined to smaller businesses, with 98 per cent of liquidations and 70 per cent of administrations being among companies with less than £1 million in turnover, according to PwC. However, the scale of the problem is now leading to fears that bigger companies could be impacted.
PwC’s Head of Insolvency David Kelly said the firm was seeing “an increasing domino effect of insolvencies where firms fail and are unable to pay their debts, thus causing the failure of other firms to whom they owe money.” Kelly added that, despite the issue being most pronounced at smaller businesses, “we’re beginning to see larger, more resilient companies come under significant pressure too.”
Kelly added that, although the scale of the businesses that had largely been entering insolvency recently was small, they are an “important part of the UK corporate ecosystem and each failure represents a loss of business for suppliers”.
With companies already facing up to headwinds such as rising energy bills and falling consumer confidence, high insolvency rates among small businesses could lead to the larger businesses that supply them losing out on both ongoing business and debts they already are owed.
These fears are seemingly spreading to some business owners, with PwC noting that compulsory liquidations are rising as companies take more aggressive actions to recover debts sooner.
David Kelly noted: “We’re seeing more corporates taking action against long outstanding debts with an increase in 7 day ultimatum letters, counting down to court action, CCJs and winding up petitions. Unfortunately it seems some directors are not confronting the issues they are facing and are not engaging with their creditors in the same manner as they did during the pandemic.”
PwC’s Head of Contentious Insolvency and Asset Recovery Carla Matthews added: “Businesses are caught in a Catch-22 between calling in their debts as creditors and ensuring they are maintaining and monitoring their own cash flow situation. The current environment has shown that businesses are prepared to push the button far earlier than usual when it comes to recovering debts - they are simply less tolerant and forgiving of IOUs.”
Read about growing levels of distress among smaller businesses.
Find out how late payments are impacting UK SMEs.
View recent administrations.
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