Governance Explainer Insolvency

According to the latest figures from The Insolvency Service, there were 25,158 registered company insolvencies in 2023.

This was the highest annual number of UK company insolvencies since 1993.

One in 186 active companies (at a rate of 53.7 per 10,000 active companies) entered insolvent liquidation in 2023. This was an increase from the 49.6 per 10,000 active companies that entered liquidation in 2022. The rate in 2023 was the highest level since Q3 2014.

Although company insolvency volumes were at a 30-year high in 2023, the number of companies on the Companies House register has increased over time, so the 2023 rate remained much lower than the peak rate of 94.8 insolvencies per 10,000 active companies during the 2008/09 recession.

The figures paint a pretty clear picture of how challenging the current economic headwinds are for UK companies.

Treading water

In January, the UK government quietly issued legislation to update 30-year-old water company insolvency laws as fears grow over the financial health of the privatised monopolies.

The new law provides more options for special administrators to restructure companies that are unable to repay their debts and may make it less likely that the government is forced into renationalising water utilities. The update came amid fears over the financial stability of Thames Water, which is owned by private equity firms, pension funds and sovereign wealth funds. Thames provides water and sewerage services to about 25% of the UK population and is struggling under the weight of its £18.3 billion group debt burden.

What is Insolvency?

There are two sorts of insolvency. Balance sheet insolvency is where the company’s liabilities exceed its assets. Cash flow insolvency is where a company cannot pay its debts as they fall due.

Cash flow insolvency can lead to balance sheet insolvency. If a company has to cease trading because it cannot pay its bills as they fall due, the value at which it is carrying its assets may need to be written down to their forced sale value instead of being shown at their going concern value.

Insolvency procedures

The main forms of insolvency are:

Administration

This has similarities with the ‘Chapter 11’ rescue procedure available in the US. It provides the company with protection from its creditors and prevents them from repossessing equipment or stock.

Administration can give the company breathing space to raise new funds, to perhaps reach an agreement with its creditors on deferred (or reduced payment) of existing debts or, give time to sell the business. An administrator is usually appointed by the company or a bank and their duty is to save the business as a going concern, if possible.

Receivership

An administrative receiver is an insolvency practitioner appointed by a bank (or other secured lender). They have the power to run or sell the business and its assets. Their overriding duty is to pay off the bank (or other secured lender) that has appointed them.

Corporate Voluntary Arrangement

A CVA is supervised by, but not controlled by, an insolvency practitioner. It can be used to compromise on or settle creditor claims. For example, creditors receive a delayed payment or a reduced payment of so many pence in the pound. This can be a powerful procedure for a company running a business that has suffered an unexpected problem (e.g. a major bad debt) but is otherwise viable.

Compulsory winding-up or liquidation

A creditor owed at least £750 can initiate liquidation proceedings. Failure to pay a bona fide debt after a 21-day written demand gives grounds to start the winding-up procedure by issuing a petition. A liquidator is appointed – normally the Official Receiver, a civil servant.  The liquidator collects the company’s assets and pays off its debts.

Pre-pack administration

This is an arrangement where the sale of all or part of a company’s business is negotiated with a purchaser prior to the appointment of the administrator. The sale is then executed immediately after the appointment of the administrator. Pre-packs can potentially preserve the brand and the value of the business, to the benefit of stakeholders. However, they are sometimes seen as controversial, especially if the business is being sold to “connected parties”, such as the directors or shareholders of the insolvent company.