Whilst covid restrictions are a thing of the past, the challenges of the pandemic are still a very much present issue. With the uncertainties of the post-covid economy, businesses in many sectors are still struggling to recover from the last few years, in addition to dealing with many new issues. Following the end of government support for businesses affected by covid restrictions, corporate insolvencies are continuing to rise in 2023.
In recent months, the majority of company insolvencies have followed creditors’ voluntary liquidation (CVL) procedures, with directors and shareholders deciding to voluntarily place the company into liquidation in order to wind up all affairs and distribute cash released to creditors. Research shows that March 2023 saw the highest monthly total of CVL cases since January 2019.
As trading climates remain so uncertain, as a result of factors including Brexit-related supply chain issues, rising energy prices, and the cost-of-living crisis affecting large percentages of the population, rather than seeking to restructure, many businesses are making the decision to choose voluntary liquidation.
In addition to rising numbers of CVLs, compulsory liquidations have also increased by over 50%, compared with the first quarter of 2022. With the moratorium on winding-up petitions lifted in February 2023, creditors are no longer restricted from petitioning to the courts to wind up companies that are in debt to them, resulting in a significant rise in CWU cases in the following year.
Sectors badly affected by corporate insolvencies
Whilst the effects of covid and other economic challenges have led to financial difficulties for businesses in all sectors, there are certain industries that have been especially hard hit.
Construction
The covid-19 pandemic caused huge financial challenges for the construction industry, including a shortage of construction materials, along with a sharp increase in construction costs. Contractors bid less during the pandemic, which not only contributed to unexpected increases in the cost of materials, but led to significantly reduced profit margins and even losses.
Following the end of covid restrictions, construction is facing a range of new issues, including soaring inflation rates, continuing supply issues, and rising costs. In addition to the current economic climate, the end of covid support schemes has resulted in financial hardship for many construction businesses.
With insolvencies rising, there has been a rippling effect throughout the sector, with insolvencies felt by other businesses in the supply chain.
Retail and wholesale
The retail and wholesale sectors have reported high numbers of insolvencies so far in 2023. Along with disrupted supply chains, and rising freight and material costs, many retailers and wholesalers are feeling the effects of the cost-of-living crisis, along with increased energy and commercial rent costs. Whilst some retail brands have been forced to close down their physical shops and operate solely online, many others have resorted to liquidation when restructuring the businesses has not been possible or successful.
Hospitality
Another sector that has shown high numbers of insolvencies is the hospitality industry, particularly pubs, bars, restaurants and entertainment venues. In addition to lower footfall due to customers feeling the effects of the rising cost of living and cutting down on luxuries, utility bills have doubled for many businesses, and the costs of core ingredients and supplies have skyrocketed.
What can directors facing company insolvency do?
It’s important that company directors and shareholders make efforts to stay aware of the different financial pressures that face their business, including the effects of insolvencies in their supply chain, and the various economic pressures affecting their industry. It’s vital that directors stay on top of their financial position, ensuring that records stay up to date and a close eye is kept on cash flow.
At the earliest sign of financial distress, it’s crucial that businesses seek professional advice from licensed insolvency practitioners. BEACON LIP works with businesses facing corporate insolvency to understand the options available to them.