The Increased Risk of Insolvency to Suppliers, Debtors or Customers When a Company Becomes Insolvent
The domino effect, as it is known, happens when one company enters insolvency and in so doing increases the risks of other companies associated with it also entering insolvency, including suppliers, debtors and customers. Recent research by R3, the insolvency and restructuring trade organisation has found that the financial impact of the insolvency of another company was seen by 10% of UK businesses as very negative, and somewhat negative by 16% – a total of 26% of UK businesses. Our insolvency practitioners at our London office look at this research in a little more detail, and comment on ways in which we can help when financial distress is caused unexpectedly by another form’s insolvency.
Underlying Insolvencies Increased by 13% in Q1 2018
It is no surprise, sadly, that the major insolvencies of large companies in 2018, including Carillion, Toys R Us and Maplin have resulted in significant problems for many other businesses. Indeed, the R3 figures show that underlying insolvencies grew by 13% in Q1 2018 compared to the previous quarter. The retail sector has been particularly hard hit, with the Centre of Retail Research reporting 26 companies failing in the first 6 months of 2018, resulting in c.1,900 stores closing and c.21,000 employees being affected.
R3 reported a strong and immediate upsurge in requests for help and advice from its member insolvency practitioners, the requests coming from the suppliers and service providers affected by the companies who had entered insolvency.
How can Insolvency Practitioners help?
The incidence of these financial problems has varied by region and by industry type, and by severity. One sector particularly affected has been the construction sector. Characterised by a complex network of contractors, sub-contractors and even sub-sub-contractors, the effect of one big insolvency on other firms down the supply chain can be unexpected, quick and devastating. Other sectors such as wholesale and transport, both of which are low-margin, are also quickly exposed to insolvencies of other firms, especially in retail.
Whatever the sector or region, however, although it is true to say that businesses should always plan to mitigate against the risks caused by the insolvencies of customers and/or suppliers, that can be more easily said than done. Businesses that were reasonably confident of their future can very quickly enter a state of distress or crisis when a major company they deal with becomes insolvent, and this is where insolvency practitioners can help.
Businesses in Distress
When a business is in financial distress, it is usually suffering from one or more of the following:
- Cash Flow Problems.
- High interest payments that it is struggling to, or cannot, meet
- Defaulting on bills
- Extended debtor or creditor days
- Falling/squeezed margins
- Stress and unhappiness
The sooner the distressed business contacts an insolvency practitioner, the more likely it is that we can do things to help to restructure and buy time to avoid a formal insolvency process. Our help can include:
- Negotiating time to pay agreements with HMRC
- Locating alternative sources of finance to stabilise the business
- Recommending and implementing cost controls
- Agreeing new payment terms with creditors
- Advising on cost cutting measures
As insolvency practitioners, our focus on businesses in distress is to work with the owners to avoid a formal insolvency procedure by recommending and implementing the optimal route out of a crisis.
Businesses in Crisis
If distress signs are ignored or not acted upon quickly enough, then the restructuring options are fewer, or possibly non-existent, in which case a formal insolvency procedure is likely to be required. These include:
- A Company Voluntary Arrangement. A CVA allows a company that owes money to enter into an arrangement with its creditors to repay its debts, or a proportion of them, over a fixed period, whilst continuing to trade and restructuring. There have been several high profile CVAs in retail so far this year, most have which have involved difficult negotiations with landlords over rent payments, whilst closing several outlets.
- Administration. An administration allows an insolvency practitioner time to try to rescue an insolvent company or sell some or all its assets to repay the creditors as much as possible of what they are owed.
- Liquidation. In this scenario, whether voluntary or compulsory, the assets of the company to be liquidated are collected and sold by the insolvency practitioner. They are then used to pay off as much as possible the money owed to creditors, in a strict order.
When a formal insolvency procedure is implemented, the responsibilities of the directors change from being in favour of the shareholders to the creditors. The role of the insolvency practitioner is to carry out as orderly a process as possible.
Contact our Insolvency Practitioners if your Business is in Distress or Crisis
When businesses enter insolvency, especially the bigger insolvencies that we have seen this year, the domino effect on suppliers, debtors or customers can be quick and unexpected. This has led to a growth in insolvencies in 2018 to date.
Whatever the cause, the sooner a business in crisis or distress contacts an insolvency practitioner, the more we can do to help. With offices in London, Brentwood, and Salisbury, we are well placed to help. Look at some of our testimonials and if you like what you see, please contact us or call us on 0208 088 0633 for a FREE initial consultation.
