Summer of sport helps provide respite but insolvency trend continues

A summer of sport and warmer weather helped provide some respite to the retail and hospitality industries in England and Wales helped the number of insolvencies dip last month compared to July, according to new figures.

Around 10,000 individuals entered insolvency in August 2024, five per cent lower than July’s total but 16 per cent higher than during the same month last year.

The rise compared to August 2023 has been attributed to continued challenges in the business services, construction and engineering sectors – with the Midlands showing a spike in insolvencies.

Last month’s figures include 594 bankruptcies, 4,166 debt relief orders (DROs) and 5,240 individual voluntary arrangements (IVAs).

According to the new statistics, the last five months all saw the highest monthly numbers of DROs since their introduction.

The number of IVAs registered in August was similar to the average monthly number over the past 12 months.

Bankruptcy numbers remained at about half of pre-2020 levels and were also lower than numbers seen over the past 12 months.

Summer of sport and warmer weather ‘provide some relief’

David Kelly, head of insolvency at PwC UK, said: “Insolvency numbers for August 2024 (1,953) were down on both July 2024 by nine per cent and August last year by 15 per cent.

“While it’s tempting to attribute the dip to a typically quieter business period in August, this pattern wasn’t evident last year, suggesting that other factors may be at play.

“A summer of sport and warmer weather from the end of July will have provided some relief to the retail and hospitality sector, offering a temporary boost in business activity.

“Despite retail and hospitality experiencing some respite, there has been an uptick in insolvencies within the business services, construction and engineering sectors.

“The increase in the engineering sector, in particular, reflects broader pressures across the automotive supply chain.

“As a consequence, we’ve seen this reflected in a rise in insolvency numbers across the Midlands, where this industry is heavily concentrated.

“According to our analysis, the Midlands accounted for 17 per cent of overall insolvencies in August 2024 compared with 14 per cent in August 2023.

“An analysis of year-on-year data up to August 2024 indicates that insolvency figures overall are at similar levels.

“Historically, we tend to see more insolvencies as we come out of a recessionary landscape, with companies unable to fund the increase in working capital as order books strengthen.

“These factors suggest that the total insolvency figure for the year could once again exceed 25,000.”

Sense of optimism ‘beginning to ease’

Jennifer Lockhart, partner and insolvency specialist at law firm Brabners, added: “Fewer businesses failing is always to be welcomed but overall insolvency levels continue to reflect the challenging environment businesses are operating in.

“Indeed, while their costs are more predictable than they have been for a number of years, interest rates remain persistently high.

“At the same time, the general sense of optimism felt at the start of the summer, with the change of government, has begun to ease, serving to curb the recent improvement in consumer confidence. 

“SMEs will take some solace in the government plans, announced this week, to pass new legislation that addresses poor payment practices and improves cashflow within supply chains. However, it is likely to be some time before the effects of this are felt.”

‘There is no single answer’ to insolvency rise

Ben Drew, partner at Alius Law said: “While the pandemic foreshadowed a tsunami of corporate and personal insolvency, government intervention acted effectively to head that off.

“However, for the last 18 months, we have witnessed a continued surge in corporate insolvencies as levels reach, and in some cases exceed, those last seen during the 2008-09 recession.

“This remains the case notwithstanding a general sense of a return to business confidence, amidst the recent cut in interest rates and the cooling of inflation, as we see corporate registrations at a record high.”

Drew added that there is “no single fixed answer” to what is causing the continued uptick in levels of corporate insolvency.

He added: “Undoubtedly, we are seeing directors, weary from years of challenging trading conditions, struggling to access cost-efficient refinancing to manage long-standing debts but there are also sector-specific difficulties.

“The construction industry was the sector with the highest number of insolvencies in Q2 this year, with firms hit by rising project costs frequently making developments unviable.

“Meanwhile, the retail and hospitality sectors are continuing to feel the pinch from an extended period of consumer spending caution.

“Our recent experience would also indicate a return to pre-pandemic levels of using winding up and bankruptcy petitions as a sword, rather than merely as a shield.

“The threat and presentation of such petitions, as a means to apply pressure and gain control in contentious situations, is certainly on the rise.”