Corporate insolvency: Reflecting on trends from 2022

28 March 2023

The UK's business community faced many challenges in 2022, and unfortunately not every firm was able to weather the economic storm. In this blog, we take a deep dive into the rise in corporate insolvencies last year and look at how different sectors across England and Wales were affected…

Unchartered waters

Last year, corporate insolvency numbers jumped to a 13-year high after an uncertain and unprecedented two years of disruption brought about by the pandemic, the impact of the war in the Ukraine on the economy, and the cost-of-living crisis.

At the same time, Government support to help businesses in light of the pandemic, like the furlough scheme and temporary restrictions on winding up petitions finally came to an end, so struggling businesses that were benefiting from such support finally lost their lifeline.

This likely contributed to a significant uptick in Creditors’ Voluntary Liquidations (CVLs), which reached their highest level in 62 years last year and accounted for 85% of insolvency cases in 2022, as more and more directors turned to this process to close down their businesses.

These figures represent the enormous challenges companies faced last year, with cost hikes across the board paired with a squeeze on household budgets, which contributed to low footfall for the retail industry and cautious spending on anything but the essentials.

And while corporate insolvencies dropped 15% in the first month of 2023 when compared to December 2022, the numbers are still more than 11% higher than they were in January 2020 (pre-pandemic) and we anticipate that economic uncertainty will continue the wave of insolvencies in the coming year.

Growing bills and tightening budgets

For all industries, insolvency numbers jumped in 2022 compared to 2021. A key contributor to the rising numbers was skyrocketing energy bills, which for households increased by 54% in April, followed by a further 27% increase in October. For unavoidably energy-intensive sectors, this meant increased costs with no room for cutting back.

For example, the manufacturing sector saw a 65.9% yearly rise in insolvencies between 2021 and 2022, and the transport sector saw a 47.6% yearly hike as well as a 44% increase from pre-pandemic levels.

At the same time, inflation has driven prices on the shelves to an all-time high, with food inflation at 16.7%, so it’s no surprise to see that insolvencies in the manufacturing of food products have risen 51.6% in the last six months.

The cost-of-living crisis has driven many consumers to cut back financially, which we believe is a major driver of the large increases in insolvencies for sectors that dependent on discretionary spending we’ve seen over the last year.

Whilst data is lacking, it is clear that the decoupling of the UK from the single-market would have had an impact on some businesses, particularly those reliant on trade, or supply chains, within the  EU. Similarly, sectors such as hospitality and agriculture have cited recruitment challenges in the wake of Brexit.

The personal services activities sector, which includes businesses like hairdressers, beauticians, pet care, and household maintenance has seen a 76.5% yearly rise in insolvencies, while insolvencies in the retail (except of motor vehicles and motorcycles) sector have increased 93.4% in the last year and accommodation and food services 61.9%.

These numbers are only expected to increase further in 2023, as the Office for Budget Responsibility forecasts household disposable income to fall by 4.3% in 2022-23 – the largest drop since comparable records began in 1956.

However, there was better news for the travel agency sector, which although saw insolvency numbers rise 127.3% in 2022 compared to 2019, it also experienced a significant 33.3% fall in insolvencies in the last six months of 2022 when compared to the first six months.

Holiday companies and tour operators have reported high demand for bookings so far this year – perhaps because people are making the most of the ability to travel after close to three years of disruption due to the pandemic.

Payment delay

Another key factor that can contribute to insolvencies is the unavoidable lag for some sectors between work being performed and payment being received.

The construction industry is one victim of this, often supplying significant work and incurring high costs in materials and labour before payment from their clients is received. As a result, the industry’s insolvency levels were 61.2% higher in 2022 than they were in 2021, and 29.3% higher than they were pre-pandemic in 2019.

Unfortunately, these issues show no sign of slowing down, with Red Flag Alert predicting that the construction sector is heading into 2023 with around £300 million of bad debt with fears this could grow to £1 billion by 2024.

Know the warning signs

R3 has produced a free guide for company directors that breaks down the early warning signs a business may be in financial distress, provides guidance on how the situation could be turned around and explains the options that might be available to do this. For more information, visit www.backtobusinessuk.com