UK insolvencies begin to rise as inflationary and supply chain pressures start to bite, and Government-support schemes start to unwind

UK insolvencies begin to rise as inflationary and supply chain pressures start to bite, and Government-support schemes start to unwind

The number of corporate insolvencies seen across the UK rose by 26 percent in the third quarter of 2021, as inflation and supply-chain pressures started to bite and government COVID-19 support measures began to unwind.

Analysis of notices in The Gazette by Interpath Advisory reveals that a total of 155 companies fell into administration or receivership from July to September 2021 – up from 123 in Q2 2021, though down from the 243 seen during the same period last year, and still at only 39% of pre-COVID levels when compared to the 401 appointments in Q3 2019.

The construction and energy sectors saw the largest rise in levels of administrations and receiverships in Q3 2021, with three times as many filings for insolvency in the energy sector (9 appointments) and twice as many filings in the construction sector (34 appointments) compared to the previous quarter.

Blair Nimmo, chief executive of Interpath Advisory, commented: “With inflation on the rise, COVID-19 support measures, including the Job Retention Scheme, now tailing off, and well-publicised issues affecting global supply chains and availability of labour, it’s perhaps unsurprising that we are starting to see a modest rise in insolvency levels as we enter the final quarter of the year.”

He said: “It’s been a particularly challenging quarter for the UK’s energy sector, which is reeling from the recent spikes in wholesale gas, coal and electricity prices to unprecedented highs. Not only has this had an impact on energy-intensive industries such as manufacturing, but it’s also left the domestic energy supply market in disarray with 13 retail suppliers entering into a SOLR (supplier of last resort) process in the last 8 weeks alone, impacting over 2 million customers who have been switched to new providers.

“The reality is that with the price cap restricting the ability of companies to pass increasing input costs onto consumers, there is little room for manoeuvre for those smaller suppliers which don’t have the financial bandwidth to absorb the higher price, leaving many with little option but to enter an insolvency process. Meanwhile, the larger players, who are being asked to take on new customers as a result of SOLR processes, are also having to absorb the cost of doing so. It’s an incredibly difficult situation, and we certainly expect further casualties over the weeks and months ahead.

“More broadly, with no end in sight to this price volatility, effective business planning is now critical. Energy-intensive businesses in particular will need to quickly and carefully consider the impacts of cost inflation and develop mitigating strategies. These could include switching suppliers, broader cost reduction programmes, or hedging strategies to combat price volatility.”

Turning to the rising insolvencies in the building and construction sector, Blair Nimmo said: “This is another sector that feels on the brink of a perfect storm. Raw material costs remain at high levels, with steel, timber and plastic products nearly 50% higher than they were pre-April 2020.

“To further compound the problem, the UK’s timber supply is impacted by both transport and Brexit-related constraints, and the construction industry is navigating a range of other issues including wage inflation, haulage labour shortages, reverse charge VAT implications, and wider instability in the global shipping industry. The knock-on effect is a stop-start situation for many construction projects, which in turn is resulting in inefficient resource allocation and downtime, creating further pressure.”

Blair Nimmo said: “The good news is that, despite these challenges, the UK and devolved Governments remain supportive, with increased infrastructure spending and commitments to new projects. Suppliers of debt capital are also continuing to provide support to businesses to help them trade through the impacts of COVID-19 and Brexit.

“Ultimately, these challenges are making businesses across the sector consider what work they want to undertake; how they manage current demand; how they quote for new work; and how they contract to try and mitigate these risks.

“We are also seeing continued challenges across a range of other sectors and have already seen an uptick in activity across general manufacturing, automotive and aerospace supply chains, and wholesale.”

Blair Nimmo concluded: “Against a backdrop of rising inflation costs and lessening government support, there are signs that the level of insolvencies are beginning to rise. We are yet to see the deluge of corporate failures that many anticipated but, whilst the outlook remains uncertain, I would expect to see filings continue to escalate, with more momentum gathering into the New Year.”

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