The shackles that prevent stakeholders from putting pressure on businesses will be swiftly removed as winding-up petition protections and rental assistance end. Those of us who work with insolvency monitor the Insolvency Service’s statistics to see how many people have gone bankrupt and how they could have avoided company insolvency.
The data on company insolvencies and creditors’ voluntary liquidations in the UK reveals varying trends. In 2021, the total number of company insolvencies showed an overall increase compared to the previous year. There was a noticeable upward trend throughout the year, starting from 2,393 insolvencies in Q1 and reaching a peak of 4,625 insolvencies in Q4. Among these, creditors’ voluntary liquidations constituted a significant portion.
In 2022, the trend of increasing insolvencies continued. The first quarter saw 4,995 total company insolvencies, and the second quarter witnessed a further rise to 5,629. Creditors’ voluntary liquidations remained prominent, with 4,359 in Q1 and 4,908 in Q2.
These figures highlight businesses’ ongoing challenges in the UK, signalling the need for continued monitoring and support to ensure corporate survival. The increase in insolvencies suggests the impact of various factors, such as economic conditions, market dynamics, and the aftermath of the pandemic. It emphasises the importance of proactive measures, financial planning, and adaptable strategies for businesses to navigate these challenging times successfully.
So, what exactly is going on? And what can we anticipate in terms of corporate survival rates in the future?
Riding Through The Past
The majority of last year’s CVLS were registered in the second half of the year, with Q4 witnessing the greatest quarterly amount of CVLS in the last few decades. On 30 June 2021, the furlough program was completed, followed by the exemption of wrongful trading liability on 30 September 2021. When a firm’s shareholders decide to wind down the business, they can launch CVLS (Creditors’ voluntary liquidations).
The number of companies entering CVL (Company Voluntary Liquidation) increased dramatically last year compared to other types of insolvency. This shows that businesses were taking their future into their own hands by choosing to go into insolvency. Many of these businesses were likely SMES that had difficulty being profitable during the epidemic and decided to call it a day.
The pandemic, which hit in the early fall of 2020, might have also had an effect. Many businesses and casual diners started CVAS in 2019 to combat declining high street traffic and high commercial rent rates. Given the continuing limitations on forfeiture and winding-up petitions, the incentive to undertake such changes has somewhat faded.
The return of Crown Preference—giving HMRC second-tier status as an unsecured creditor—killed any chance for CVAs to catch on since it limited the number of options available to other unsecured creditors.
In 2016, fewer companies were saved via administration than in any other year since 2003. Given the withdrawal of numerous support measures, this ‘business rescue’ procedure was not on the agenda list of many firms, with many opting to go straight to a terminal bankruptcy scenario (like liquidation) rather than continuing to limp along.
What Does the Future Hold?
Turning to 2022, it is widely expected that company insolvency filings of all types will rise. In fact, when these quarterly insolvency data are compared with those from Q4 2021 and Q3 2021, the difference becomes apparent.
This perspective is based on the belief that corporate shackles that have kept stakeholders from putting pressure on companies will soon be removed. The partial suspension of creditors’ rights to file winding-up petitions against firms with uncollected debts is extended until March 31, 2022. A creditor must ask a debtor business for payment proposals for obligations over £10,000. If the debtor does not respond in 21 days, the creditor can take legal action to wind up the company.
Landlords are still stymied by the current regime, which restricts them from obtaining winding-up petitions against tenants for unpaid rent since business rentals are excluded from debts. The government is keeping the limitations on forfeiture for non-payment of rent, and the commercial rent arrears recovery procedure stays in place until March 25, 2022. As a result, it is assumed that by the end of March, creditors will have a fair game to play.
Other problems include increasing interest rates, inflation, and import costs for businesses. It is difficult to know exactly what this means for the number of people who go bankrupt and how this will impact bankruptcy rates (many insolvency experts anticipated a considerably more active pandemic than what transpired). Many creditors were put to the test during the pandemic, but they might be less forgiving now.
Managing The Solvency Issues
The first step is to make sure you put efforts into avoiding such issues especially given the government’s apparent loss of interest in assisting struggling firms. This was made clear by the most recent energy crunch, with only Bulb Energy receiving any government assistance.
Second, the easy way out – dissolving a firm by voluntary strike-off and starting over – is no longer quite as simple.
The new Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, which came into force in January, gives the government more power to investigate the conduct of directors of dissolved companies. This includes investigating any wrongdoing that may have occurred even after closing the company.
However, businesses must be cautious of their crucial creditors, especially banks, landlords, and HMRC. These are frequently the ones who have the most to lose if a company goes bankrupt, so it only makes sense that they should be handled with care. Rather than engaging in an extended, complicated, and expensive overall restructuring with creditors, perhaps they should address each separately.
Suggestions For Managing Solvency Issues
- It should consider potential amendments and extensions to bank loans, such as extending debt maturities or changing loan repayment terms.
- In the commercial real estate sector, tenants should contact a commercial landlord to negotiate a rent reduction contract or seek a referral under the Commercial Rent (Coronavirus) Bill, which is expected to become law at the end of March 2022. Any disputes over unpaid commercial rent for any required business or premises closure period between March 2020 and July 2021 may be referred to arbitration. Any such referrals must be made within six months of the bill’s passage to become law. During the arbitrated period, landlords will be prohibited from forfeiting valid leases or attempting to recoup the protected debt with a debt claim. One thing to note is that the arbitration process is not available to those subject to a CVA, scheme of the arrangement, or restructuring plan, and it’s most likely to aid tenants who have been unable to keep up with their rent payments due to the pandemic or who would be unviable without the arbitrator’s assistance.
- Contact HMRC to discuss a time-to-pay arrangement. If unresponsive debtors fail to engage, HMRC will likely take action against them.
All viable restructuring alternatives should be investigated before putting a firm out of business. Insolvency includes two options that have only recently been introduced: the standalone moratorium and the restructuring plan. It might seem like a bad idea to protect your company’s finances, but if you get help from skilled consultants early on, you might be able to avoid a worst-case scenario.
Strategies To Avoid Company Insolvency
How can you prevent your firm from going bankrupt? This post looks at some strategies for managing your business effectively before it’s too late.
Sell Any Excess Assets And Lease Equipment
If you have equipment or furniture you don’t use, you can sell it for extra money. This can help you pay off any debts that you may have. Then, after that, renting assets is a wonderful alternative to purchasing them. Equipment leasing is a fantastic method to acquire equipment without having to spend a significant amount of money upfront. It’s more practical than buying something outright because you only pay for it in manageable monthly instalments rather than paying an enormous sum for something.
Leasing can help you to have greater control over your finances and will be able to keep up with the competition. Leasing allows you to access the most up-to-date technology and software at a fraction of the cost. When the lease is up, you may return it.
Seek Out Financial Assistance
If suppliers and consumers pay late, your finances can be chaotic, leaving you unable to settle your obligations. You may get rid of cash flow concerns by employing a loan, knowing that you’ll be able to pay your workers and other expenses on time every month, no matter how many bills have been paid.
Have Your Debts Pursued To The Fullest Extent Possible
You might be in serious trouble if you are a UK SME business owner with outstanding debts. However, invoice factoring could help you out. A finance company specialising in invoices, like invoice factoring, assists you in collecting funds from your customers through the collection of outstanding bills. You won’t have to waste time and energy hunting for payments. You may sit back and relax, knowing everything has been resolved.
Both invoice factoring and invoice discounting have pros and cons, so make sure you have enough information before making your decision.
Only Work With Reputable Suppliers And Customers
It’s easier said than done, but you must begin learning from prior mistakes and relying on your instincts.
If you’ve had trouble with a customer or supplier in the past, you need to determine whether it’s worth attempting another collaboration. If you decide to continue working with them, you may wish to reconsider your payment terms for suppliers and request staggered payments so that you aren’t put off until the end of the month.
When looking for a supplier, it’s a good idea to ask other business owners for recommendations. You can also ask some preliminary questions to see how they treat you and whether they offer discounts if you pay quickly. This will help you weed out reliable and trustworthy suppliers from the ones that you should avoid.
Reduce Operating Expenses
If you’re having trouble staying afloat, consider reducing your staff so that you can focus on scrutinising your fixed costs, such as rent and other property expenditures.
Here are just a few of the areas where you might save money:
- Office space
- Business Process Outsourcing
- Benefits For Staff
- Automating The Tasks
Make Yourself Available To All Of Your Vendors
It is very important to communicate with your suppliers. If you are having trouble controlling your cash flow, you might want to renegotiate the terms of your payment agreement so that you can better manage your expenses.
New contracts with current providers should be negotiated to see if you can provide them with anything of value, such as assistance in entering a new market or expanding their network. Whatever it is that you may offer to bargain with them over, go ahead and do it.
Make An Investment In An Accurate Forecasting System
Knowing where you stand with respect to cash flow is critical to company success. Without this information, you’re blindly guiding your company each month.
Software like QuickBooks and Sage can help you understand your cash flow in the future. This can be very helpful for planning ahead for things like investments or other large expenses. Reports like these assist you in anticipating the future; they help you concentrate on your spending habits so that you can swiftly address any issues you detect on the horizon which may cause your company to collapse later on.
Don’t Undervalue The Value Of Marketing And Customer Service
By understanding them in detail, you can create campaigns that resonate with your audience. Take the time to interview existing clients, figure out why they buy from you, ask them about their initial barriers to purchasing from you, and target your most profitable audience segments.
Did you know it’s easier to market to existing consumers than new ones? This implies that you should not write off current clients. Customer loyalty is essential for brand advocacy, and there’s more money to be made; according to statistics, improving customer retention by 5% can boost profits by 25-95 per cent.
Create A Sign-Off Process
Currently, your workers may spend money on your behalf, but having a sign-off procedure for all expenditures by all personnel might be a good idea.
Even with little expenses, you must be familiar with what you spend your money on, especially if it’s a significant sum. Then, when a staff member comes up to you and asks if you’d sign off on something, you can choose whether it’s wasteful or necessary to keep your company functioning smoothly.
When Chasing After Bills, Be Consistent
If you want to tackle significant debts independently, you must be consistent in your methodology. When you have so much on your mind when operating a business, you must not allow customer contact to fall through the cracks. Call frequently to check on the payment procedure—has the invoice been authorised yet? When can you expect to receive the payment?
Conclusion
These are just a few tips that you can use to help your company avoid insolvency in 2023 and onwards. Remember to focus on your cash flow and keep a close eye on your spending habits so that you can avoid any unpleasant surprises down the road! Stay vigilant and stay afloat! Speak to your accountant if you think any concerns might be an issue, so they can help you better prepare your business for the future.
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