What’s shaping the corporate insolvency landscape in England/Wales and Scotland?

21 August 2024

The corporate insolvency statistics for Q1 of the 2024 financial year from the Insolvency Service and Accountant in Bankruptcy reveal a complex picture of the financial landscape across the UK. In this blog, we take a look at the most recent quarterly corporate insolvency statistics for England/Wales and Scotland and explore how the UK economy is beginning to recover after a challenging few years.

Scotland insolvencies fall, England and Wales rise

Corporate insolvencies in Scotland fell by 3.1% in the first quarter of the financial year (April to June) when compared to the same period in 2023, to a total of 283 cases. This figure also marks a 6% decline from the previous quarter (January to March), which saw 301 corporate insolvencies.

In contrast, England and Wales have seen substantially higher corporate insolvency numbers when the first quarter of this financial year is contrasted against the first quarter of 2023’s. Between April and June 2024, there were 6,602 corporate insolvencies in England and Wales – a 2.4% rise from the same period in 2023 when 6,445 insolvencies were recorded. Levels in the first financial quarter of 2024 were also 13.4% higher than the previous quarter (January to March), which saw a total of 5,822 corporate insolvencies.

The reasons for the difference in corporate insolvency trends between Scotland and England/Wales aren't entirely clear. It's possible that Scotland could see insolvencies follow the England/Wales trend later, or it could simply be that Scotland has bounced back faster from the effects of COVID-19 and the cost-of-living crisis. We will be looking to data in the second half of 2024 to understand whether this is a momentary difference or if it will be a long-term trend.

A different picture

The current corporate insolvency numbers in England, Wales and Scotland are still much higher than they were before the pandemic. In the first quarter of the financial year, insolvencies in England and Wales were 55.7% higher than they were during the same period in 2019, prior to the pandemic. This suggests that businesses are still grappling with the long-term effects of economic disruptions caused by the pandemic, the war in the Ukraine and the increases in interest rates and energy bills. The story is similar in Scotland, where levels in April to June 2024 were 17.9% higher than in April to June 2019.

Comparing the current quarter to Q1 2019 also reveals significant shifts in the types of insolvency process companies are opting for. In Scotland, CVLs have more than doubled since pre-COVID and compulsory liquidations have decreased by nearly a third. This indicates a shift in creditor behaviour and an increase in directors voluntarily closing their businesses.

CVL numbers in England and Wales have also risen by 75.1% since before the pandemic which suggests there are more insolvent businesses looking to shut down and pay off their debts than there were in 2019. Compulsory liquidation numbers have also risen by a more modest 12.8%, which is reflective of the overall greater number of insolvent businesses in England and Wales than in Scotland.

It is also interesting to note that administration levels in England and Wales rose by 15.2% in the months April to June when compared to the same period in 2019. This increase suggests that there are more insolvent companies for whom rescue is a potential option than there was pre-pandemic, that the economic environment is improving and that there is greater support from secured creditors.

Legislative impacts

The recent General Election has introduced some uncertainty into the market for businesses across the UK, especially for the construction sector which saw many projects halted over the summer months. However, the Labour government’s pledges to invest in infrastructure and to build new houses could lead to a surge in new projects later this year and into 2025, providing a much-needed boost to both small and large firms.

In Scotland, the recent increase in the Energy Profit Levy from 35% to 38%, raising the overall tax rate for the sector to 78% from 1^st November 2024 is expected to impact the economy. This tax hike could affect the oil and gas sector, potentially leading to a rise in insolvencies in Scotland in this key sector.

In June 2024, the Scottish Government also passed the Circular Economy Bill which grants new powers to increase reuse and recycling rates. This could have an impact on some businesses in Scotland, particularly those in the food and hospitality sectors, with the introduction of new charges on single-use items such as disposable coffee cups. Restrictions on the disposal of unsold consumer goods may also impact manufacturers and retailers, who will need to adapt to the new legislation by reducing stock levels or exploring new, green avenues for selling unsold stock.

Economic recovery

Despite a tough business environment, there are reasons to be hopeful. The economy is on an upward trajectory again, with both business and consumer confidence on the mend.

The latest ICAEW Business Confidence Monitor for Q2 2024 shows a sustained increase in business confidence in Scotland, which is now at its highest level in two years. However, the Q2 increase was only slight, rising from +15.4 to +15.6, and now lags behind the UK average which currently sits at +16.7.  Political uncertainty amid the recent General Election may have played a part in slowing the rise in business confidence, though this should rebalance in the coming months with a new Scottish First Minister in post and as the new Labour government settles in.

Events like the Euros, the Edinburgh Fringe Festival, and big music events like the recent Taylor Swift concerts in London, Cardiff, Liverpool and Edinburgh have provided a lot of hope for sectors across the UK such as hospitality, retail, and tourism. Barclays ‘Swiftonomics’ report estimated that Swift’s UK tour boosted the economy by almost £1 billion, and 2022’s Fringe Festival injected £407 million into Edinburgh’s economy and £367 million into Scotland’s overall economy – figures that will hopefully be replicated, if not improved upon, in 2024.

The Bank of England also recently lowered interest rates to 5%, bringing them down from a 16-year high. This comes at the same time as the UK's inflation rate, which peaked at 11.1% in October 2022, has stabilised at 2%. For many businesses across the UK, this reduction in interest rates will mean lower borrowing costs, making it easier to manage existing debts. For some businesses, however, this may have come too late with debts already at an unmanageable level and creditor pressure rising.

Spot the warning signs

As ever, the critical points for any director whose business is struggling are firstly to be aware of the signs of business distress and, secondly, to act on them as soon as they present themselves so they have the best chance of improving their situation and as many potential options as possible for resolving it.