Businesses are still struggling to recover post-Covid, with corporate insolvency figures continuing to rise. Recent research shows that the most common company insolvency procedure is creditors’ voluntary liquidation (CVL) and in March 2023, there was the highest monthly total of CVLs since January 2019.
The sectors that appear to have been hit the hardest are construction; wholesale and retail; accommodation and food services.
The construction sector suffered the highest number of insolvencies in the first quarter of 2023. North East construction company Metnor Construction, and its parent group, were just one of many that have entered administration after 20 years of trading, despite being involved in several big construction contracts in recent years. Soaring inflation rates, supply issues and rising costs were listed as the key financial challenges faced by the business.
Less than a week later, another well-established construction company, the Tolent Group, entered into administration. The Group had been involved in major developments in the North East of England including Riverside Sunderland, the Hadrian’s Tower residential scheme and the Milburngate development in Durham, the latter of which became significantly loss-making due to increased costs, labour shortages and the loss of other companies within its supply chain. This demonstrates the rippling effect that the increased number of insolvencies has on other businesses. The dwindling of Covid support schemes, coupled with the current economic climate, resulted in financial hardship for the Tolent Group, as it will for many others.
The wholesale sector quickly follows in terms of the number of insolvencies reported for the first quarter of 2023. Fashion brand Lavish Alice is restructuring its company after its wholesale arm was placed into administration due to supply chain disruptions and rising freight costs, even though it generated revenue of over £5 million during 2022. Lavish Alice will now operate solely as on online brand.
Another sector that has shown a particularly high number of insolvencies is the food industry. Prezzo, an Italian restaurant with a number of locations across the country, has recently had to close a third of its restaurants as a result of rising costs for core ingredients and a doubling of utility bills in the past year. The cost-of-living crisis, the effect of which is being felt by consumers and businesses alike, was also a big contributor to the closures.
Advice to directors
Whilst Covid is now largely in the past, the cost-of-living crisis, high inflation rates, increasing costs and utility bills are the new challenges faced by businesses. Directors should make themselves aware of the economic pressures facing their businesses and take proactive steps to avoid (or deal with) these financial difficulties. This could include, amongst others, the following steps:
- Keep regularly appraised of the company’s financial position. As part of this, frequent meetings should be held, and accurate minutes should be kept of these meetings. The purpose of these meetings should be to review the company’s financial position and to consider the impact of any decision on creditors, especially if there is a risk of insolvency.
- As soon as there are signs of financial distress, it is important that you seek advice from a lawyer or licensed insolvency practitioner.
- All financial records and accounts should be kept up to date.
- Always ensure that your actions comply with your director duties as these may be scrutinised at a later date should the company enter into a formal insolvency process.
- Keep creditors and HMRC informed of the company’s financial position.
- Review what insurance coverage the company has, noting that you may need to seek advice from your broker.
- If demands for payment and legal proceedings are served on the company, ensure these are promptly responded to and legal advice is sought at the earliest opportunity.