Your 2024 Guide To Insolvencies

Insolvency is when a company is unable to meet its financial commitments due to a shortage of cash, or when the total value of its assets is less than the money it owes any creditors. 

Either scenario can ultimately lead to the winding down of a business, which is why it’s important to spot the warning signs of insolvency before it’s too late.

When it comes to choosing the right solution to insolvency, regardless of the size or complexity of your problem, there are four main services and procedures:

CVL

A Creditors’ Voluntary Liquidation (CVL) is a voluntary process initiated by the company’s directors to cease trading and liquidate the company. 

Unlike involuntary liquidation, which is often the result of creditor enforcement action, a CVL is a voluntary process, allowing the business to address its debts and conclude affairs in a structured manner.

MVL

Members Voluntary Liquidation (MVL) is a formal process used by solvent companies seeking a tax-efficient and orderly closure or restructuring of their business.

It is typically utilised in scenarios such as the retirement of owners/directors, business closure or exit from markets, group reorganisation, or in the case of mergers/demergers.

CVA

A Company Voluntary Arrangement (CVA) is a legally binding agreement that allows your company to settle its debts partially or in full over time while retaining control of its operations.

Administration

Administration is a formal insolvency procedure that allows Licensed Insolvency Practitioners to take extensive control of a company’s business, providing a ‘pause’ on creditor actions and offering vital breathing space. 

This process aims to rescue, restructure, or sell the business in a manner that maximises returns for the company’s creditors. This service is particularly effective when there is a viable core business, valuable assets, or a significant client base at stake, and where legal actions or more extensive procedures might be detrimental.

According to Reuters, the number of companies declared insolvent in England and Wales in February 2024 was 17% higher than the same month a year earlier.

In fact, the latest figures from The Insolvency Service showed that the number of corporate insolvencies last year hit a record 30-year high.

So, what has caused the growing increase in insolvencies over the last few years?

Aftermath of the pandemic

In 2020, the global COVID-19 pandemic brought the world to a standstill by disrupting business, economy and life as we know it. As a result, the UK government introduced various measures such as furloughing through the Coronavirus Job Retention Scheme and grants to help businesses weather the storm.

Four years on, however, many of these schemes have now completely stopped. With little to no support past 2021 despite several extensions, some businesses are struggling to return to their pre-pandemic numbers.

Cost of living crisis

The cost of living crisis has been an unavoidable topic in the news and only a small trip to the supermarket reveals the devastating effects it has had on finances. Since late 2021, the price of everyday essentials, such as groceries and fuel, have been increasing at a rapid rate with income wages failing to catch up. But, it’s not just the weekly food shop that has been affected. 

Higher outgoing expenses, supply chain issues and the ongoing energy crisis are just some of the cost of living effects leading to an enormous surge in insolvencies. Even major companies are feeling the hit as last year saw a 58% increase in the number of redundancies where businesses aimed to cut costs where they can.

Economic downturn

With soaring food and energy bills, the latest figures show that the economy failed to grow in the last two quarters of 2023—a technical statistic that means the UK entered a recession at the end of the year.

In an attempt to control inflation, The Bank of England raised interest rates from 0.1% to 5.25%, a rate it has now been held at for the fifth time in a row. 

This means the cost of borrowing for loans such as mortgages is on the rise as the banks discourage businesses from spending more. The current bank rate is at its highest number in 16 years, adding an additional financial burden to businesses already coping with operational challenges from COVID.

Shift in consumer demand

The impact of inflation has led to some tough business decisions: bear with the costs or increase product prices. With many companies taking to implementing the latter, the average consumer has to reconsider where they spend their money.

Most notably, UK businesses specialising in non-essential goods and services are experiencing the worst of the demand shift as their products have become unaffordable luxuries.

The pandemic and rising cost of living have created a perfect storm for businesses facing insolvency. Any one of the factors mentioned can lead to a company becoming insolvent and so with all these factors at play one after another, it’s no surprise that insolvency rates are on the rise.

With the causes behind the rising numbers of insolvent businesses in mind, here are ten key indicators to look out for that could signal your company is facing insolvency:

The tipping point in which a business becomes insolvent depends on several factors unique to each company’s circumstance, and so cannot be attributed to a single indicator. Therefore, it’s important to seek clear advice at the earliest opportunity to enable as many restructuring and recovery options as are available.

If this has left you wondering or even created more questions, we’ll be more than happy to support you. At Parker Andrews, we are dedicated to providing award-winning, realistic, and empathetic advice for all your insolvency needs.

Get in touch with us for a confidential consultation and take the first step towards resolving your financial difficulties.