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Analysis: Q3 statistics show Brexit insolvency rise and ‘shadowy’ behaviour

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The number of business closures have risen since the Brexit vote, according to the Q3 insolvency statistics released by HMRC last week.

Business insolvencies are up by 2.2% and voluntary liquidations are up by 5.5%, showing that more businesses are choosing to close.

Simon Underwood, partner and business recovery specialist at Menzies, commented on Brexit “hitting home”: “Currency fluctuations and the challenging UK financial market have left many businesses stuck facing rising costs.”

The rise in voluntary liquidations is a worrying trend, in that business owners are deciding their company is not financially viable. Adopting a cautious cash management approach should ensure that businesses are in the ‘best position possible’ to handle the continuing impact of Brexit.

More regulatory control

Underwood added: “Government should consider introducing more fiscal support and reducing regulatory controls for SMEs. Businesses could work with suppliers to alleviate pressure across their supply chains and identify the burden of additional costs with customers.”

An estimated total of 3,633 companies entered insolvency in Q3 2016, which was 2.2% higher than Q2 2016 and 1.1% higher than Q3 2015. Case numbers have been flat for the past year, proceeding a trend of decrease from 2011 through to 2015.

 

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Shadowy behaviour

Brian Johnson, insolvency partner at HW Fisher & Co, said some companies were “avoiding scrutiny”.

“There are two reasons for the flat insolvency figures, on the one hand, modern recovery and rescue procedures which are more robust than they used to be. On the other hand, a lot of companies that should have gone through a formal insolvency procedure are managing to be struck off the register, avoiding scrutiny.”

Johnson said a lack of resources at HMRC, which policed the area, was making the voluntary route attractive for some directors: The ‘black insolvency economy’ is a controversial issue, as many company directors are managing to effectively shirk their responsibilities and shut up shop without an investigation or consequences.”

The Q3 BCM and Economic Forecast data from ICAEW highlighted a dip in business confidence and business investment.

“Businesses are not employing solid financial management to deal with a tumultuous economic landscape”, said Clive Lewis, head of enterprise, ICAEW.

Insolvency framework review

The Review of the Corporate Insolvency Framework, published by the Insolvency Service last month, has prompted fearful responses from the credit community on the fall of businesses, that may be disproportionately protected at the expense of their creditors.

There were four key areas of proposed reform to help financially distressed companies which included; creating a new Moratorium period, provision to require essential suppliers, the creation of a new restructuring plan and measures to encourage ‘rescue finance’.

In terms of the Rescue Finance proposal, most agreed that a lack of finance rarely prevents the rescue of viable businesses; the existing framework does permit rescue financing, which there is currently a market for.

Philip King, chief executive of CICM, said that the compelling arguments surrounding the proposals might be ignored: “A move to a new model, similar to Chapter 11 for UK businesses heading towards insolvency, could have serious, unintended consequences for creditors, cashflow and thousands of small businesses within the supply chain.”

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