Brexit uncertainty and struggling high street retailers have fuelled a rise in the number of company administrations to the highest level in five years, according to official figures.
The Insolvency Service said there were 451 administrations in the first three months of the year, up 21.8% from the final three months of 2018 – and the most recorded by the government agency since the first quarter of 2014.
Firms in financial distress go into administration in an attempt to salvage themselves as a going concern or to recoup more money for creditors than if they were wound up.
Total underlying insolvencies – which includes liquidations and creditors voluntary arrangements alongside administrations – rose by 6.3% on the quarter to hit 4,187 in the first three months of 2019, the second highest level in five years.
Insolvency experts said Brexit uncertainty had put intense pressure on firms as they stockpiled more goods before the original Brexit deadline on 29 March, now postponed until October.
In the UK, a company can be put into administration if it’s in debt and can’t pay the money it owes. The move protects the company from legal action to recover the money and allows it time to try and recover the situation..
The running of the company is taken over by an administrator, who is required to be a professional insolvency practitioner. The administrator has control over the company, and can cancel or renegotiate contracts, or make employees redundant.
The administrator will them make a plan for the company, which may include:
- negotiating with creditors about the amount they are owed to try and reduce the debt so that the company can keep trading
- selling the business as a ‘going concern’ to another company
- selling company assets to pay off some or all of the debts
- closing the company
Administration ends automatically after a year, but can be renewed. It will also end when the administrator is satisfied that they have rescued, sold or wound up the company.
Mike Cherry, national chairman of the Federation of Small Businesses, said rising employment costs, business rates and significant Brexit uncertainty in particular had taken its toll on smaller firms.
“Ongoing uncertainty is a critical issue for small firms and the self-employed, and central to this is the unknown nature of what the UK’s relationship will look like with the EU,” he said.
Retailers who struggled over the crucial Christmas shopping period typically go into administration in the first quarter. Trading on the high street has recovered over recent months, but retailers had said the festive season was one of the worst they had seen in a decade amid subdued levels of consumer confidence.
The Insolvency Service said the wholesale and retail trade and vehicle repair industry had the largest increase in underlying insolvencies over the quarter.
Stuart Frith, president of insolvency and restructuring trade body R3, said firms had “exhausted their standard toolkit for coping with reduced demand”, adding: “Further discounting won’t cut it, or is impossible, and a restructuring is the only option.”
The figures also showed that personal insolvencies fell by 8.1% from a record high at the end of 2018, but were still 15.9% higher in the first three months of 2019 than at the start of last year.
There were 31,527 individual insolvencies in the first three months of the year, the second-highest since 2010.
Analysts said consumers were struggling with high levels of personal debt on credit cards, while real wages remained below the peak recorded before the financial crisis a decade ago.
Peter Briffett, co-founder and chief executive of the pay app Wagestream, said: “That the insolvency rate today is more than double what it was in the early noughties underlines how, as a nation, we have become increasingly leveraged on debt.”
