Monthly insolvencies more than double year-on-year

Following the publication today of the latest monthly insolvency statistics for January 2022 by The Insolvency Service, Claire Burden, Partner in the Advisory Consulting team at Tilney Smith & Williamson, the wealth management and professional services group, comments:

The monthly insolvency statistics published by The Insolvency Service for the month of January 2022 show that number of registered company insolvencies (1,560) in England and Wales was more than double the number registered in the same month in the previous year (758 in January 2021) and similar to the number registered two years previously (1,508 in January 2020).

These rises were particularly influenced by the higher number of creditors’ voluntary liquidations (CVLs), which were more than double the number in January 2021 and 34% higher than in January 2020. The Insolvency Service added in its latest update: “Numbers for other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic, although there were more than twice as many compulsory liquidations as in January 2021.”

As the western world moves out of the pandemic, we are starting to see several macro-economic factors causing distress in businesses in the UK – primarily driven by global inflationary trends (which is resulting in increasing cost of living, bringing wage pressure) and also continued supply chain disruptions and raw material and commodity shortages. Sectors that are most vulnerable to all of these at the same time – such as construction, manufacturing and technology will be the most impacted. It may not be easy for SMEs to be able to pass cost increases onto the consumer, leading to short-term liquidity pressures and longer term distress.

Businesses that thrived under the pandemic are now at risk – for example online low-cost retail businesses are now being put under considerable pressure as they struggle to pass price increases onto customers for fear of high volume demand falling away.

We see clients in cyclical sectors such as agriculture suffering from liquidity pressures due to wage inflation, skills shortages, increases in cost of raw materials (due to supply disruptions and lower exports from producers) and, to some extent, the cost of transitioning to sustainable farming – which is impacting near-term cash availability. While this may not lead to insolvencies, businesses should evaluate various forms of accessible finance to manage these short-term risks. While optimising working capital cycles is a great way to release cash, other solutions could include borrowing against assets, raising project finance or seeking long-term debt (in scenarios where balance sheets have healthy asset positions).

Interest rate increases have not yet influenced insolvency levels, but considering the level of debt currently held, we expect this to cause additional pressure in the future, particularly in low margin and smaller businesses.