On the Spot

The number of registered company insolvencies in March 2022 was 2,114. This is 34% higher than the number registered three years prior (pre-pandemic; 1,582 in March 2019). Overall, the first quarter of 2022 has seen 5,197 company insolvencies, the highest quarterly figure since Q3 2017. The bulk of these insolvencies were made up of Creditors’ Voluntary Liquidations (CVLs), with 1,844 CVLs in March 2022, more than twice the number of CVLs recorded in March 2021 and up by 62% on figures from March 2019. 

This surge in CVLs is predictable considering the withdrawal of government support and the ending of restrictions on creditors and landlords taking action against businesses. Businesses with heavy debt burdens have seen their financial issues exaggerated by issues such as rising interest rates, growing energy costs, and the withdrawal of government financial support.

The fear that the UK could be entering a new age of stagflation is becoming a racing certainty. Stagflation of course is a toxic combination of stagnant growth and rapidly rising prices - and runs the risk of intensifying the current squeeze on living standards. 

Inflation in March climbed to 7%. The pickup in inflation is broad-based - unsurprisingly, Russia's invasion of Ukraine has intensified the problem by cranking up energy costs, but there is more to it than that. Food, eating out, clothing and furniture have all become more expensive in recent months. However, there is worse to come... when the April inflation figures are released next month they will include the 54% increase in the energy price cap – which alone will add about 1.8% to the annual inflation rate. 

UK average earnings (minus bonuses) rose 4.1% compared to 2021, but actually dropped 1.3% when adjusted for inflation. This is the sharpest fall since 2013 according to the ONS. Jobs growth does show signs of slowing as employers added 35,000 to payrolls in March, below most forecasts and the lowest number since February 2021.

Analysts have warned that this latest jobs data and the slow growth of the UK economy in February make stagflation a very possible, grim reality, for the UK... 

Temporary insolvency measures that were put in place during the Covid-19 pandemic have been lifted today, as the remaining pandemic support schemes end.

Nick and Jo ask how this could all play out. In a world in economic turmoil and still recovering from the enormous impact of the covid pandemic, and now facing a different crisis in Ukraine... times have never been more uncertain.

The insolvency measures were introduced as part of the Corporate Insolvency and Governance Act 2020to limit the impact of Covid-19 related trading restrictions on businesses. Measures helped to protect firms from being wound up by creditors where businesses had suffered cash-flow problems because of reduced pandemic trading. Businesses operating in the retail and tourism sectors were particularly badly hit by the pandemic and relied heavily on government support. Additional measures had also been put in place in the commercial rental sector to protect tenants who were unable to meet rent payments.

Of course, these measures had helped keep the number of businesses folding during the height of lockdown restrictions at a minimum. But as the insolvency regime enters back into normal pre-pandemic operations, there's likely to be a significant increase in creditor activity. It is highly anticipated that creditors, who have not been able to seek to wind up insolvent companies in respect of most debts for approximately two years, will now seek to take action which may lead to a significant increase in petitions...

Rishi Sunak delivered his Spring Statement earlier this week. The Chancellor pointed out the support he was giving to many financially troubled households, but the truth is that most people will suffer financial hardship in the coming years as the UK suffers the worst fall in living standards since records began.

The Chancellor has been heavily criticised from all sides for not doing more to help hard-pressed people across the UK facing rising energy bills, rising prices and rising taxes. Media reaction to Rishi Sunak’s Spring Statement has also been negative and some of the numbers around the cost-of-living crisis and the UK economy are even more worrying...

The Office for Budget Responsibility (OBR), which provides independent analysis of the UK’s public finances, forecasts a 3.8% rise in GDP in the 2022 calendar year, down from an earlier 6% prediction, and growth of just 1.8% next year as the post-Covid recovery slows down. The OBR also predicts that inflation, which has just hit a 30-year high of 6.2%, is likely to peak at a 40-year high of 8.7% in Q4 2022.

Alarming government borrowing figures have also been making waves. The Treasury will spend more servicing the UK's ballooning national debt in 2022 than it will on almost every other government department. In the next financial year, debt interest payments will amount to £83bn – the highest ever on record and almost four times the amount that was spent pre-pandemic.

The Bank of England raised interest rates from 0.5% to 0.75% last week, emphasising its determination to fight sky-high inflation, which is now expected to hit 8% by the end of June. The bank's interest rate hike is the third increase in a row in as many policy meetings. The bank's policymakers cited the rising cost of living and strong employment as the reasons for the latest rate rise.

The bank's Monetary Policy Committee (MPC) stated that Russia’s invasion of Ukraine would also “accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes”. The MPC said that economic growth in countries that are net energy importers, including the UK, was likely to slow and that inflation could climb even higher in the autumn when energy prices are set to rise again. 

Also covered in the episode are recent insolvency statistics, and some changes we are beginning to see in the number of company administrations. 

The main topic of conversation this week continues to be the Ukraine crisis and its rippling effects on the UK and beyond. Fresh sanctions on Russian oligarchs are being imposed daily with Chelsea FC owner, Roman Abramovich, the latest to be sanctioned by the UK government as part of its response to Russia's invasion of Ukraine.

Another key talking point is the Economic Crime (Transparency and Enforcement) Bill that was discussed in the House of Lords yesterday. The Bill seeks to establish a register of overseas entities and their beneficial owners, amend financial sanctions law and reform the UK’s Unexplained Wealth Order (UWO) to empower criminal investigators.

A long-awaited white paper was published on corporate transparency and register reform recently, which sets out plans to enhance the role of Companies House and to increase the transparency of UK corporate entities. We have been expecting this announcement for some time and these reforms have been accelerated in response to the current crisis in Ukraine.

The Centre for Economics and Business Research (CEBR) has also published a warning about the impact of the crisis. They estimate that GDP growth in the UK will more than half from the previous forecast of 4.2%, to 1.9%. Inflation is forecast to hit 8.7% in Q2 2022, and disposable income is forecast to fall 4.8% - which is the largest drop in living standards since records began. Oil and gas charges, rocketing again because of the conflict, will drive prices up as food transport and production costs also escalate - the CEBR expects the combined effects will shave £2,553 off household budgets in 2022...

Russia's invasion of Ukraine is a conflict that could develop into Europe’s biggest since 1945 and has destroyed hopes of a strong global economic recovery from coronavirus. The immediate global repercussions of the war will be higher inflation, lower growth, and some disruption to financial markets as stronger sanctions take hold. The longer-term fallout will be a further debilitation of global supply chains and integrated financial markets.

Jo and Nick discuss the ripple effects of the war and its impact on the aviation, energy, motor, and food sectors, amongst others. Russia’s military action in Ukraine will of course have implications for domestic consumers also. The most likely economic impact, at least initially, will come through higher energy prices - felt in petrol prices and then potentially energy bills (for businesses, as well as households). Food prices may also rise, Russia and Ukraine are important producers of wheat, accounting for 30% of global exports. The price of wheat alone has risen over 50% in the past month.

Ukraine also supplies 25% of the world’s neon gas, which is essential to the production of semi-conductor chips, which were already in high demand before war broke out.

Whilst the ultimate outcome of the war is unknown, and perhaps always will be, it has never been more critical to manage supply chains and mitigate your exposure to financial risk.

On the Spot this week is Greg Connell, founder of InfolinkGazette - publisher of comprehensive insolvency information, including details of Unpaid and Unsecured Creditors from UK company failures, and deliverer of unique business information. 

Greg talks about the worrying trend he is beginning to see from the High Court; the number of winding-up petitions that are being filed is increasing rapidly. These petitions are filed one month before they are published in the gazette and are a leading indicator of compulsory liquidations...

In January 2022 there were 1,358 Creditors’ Voluntary Liquidations (CVLs), more than double the number we saw in January 2021. 

Jo and Nick also examine the impact of ending various covid government support measures on businesses, and what changes we may see going into 2022. In particular, there is concern around what might happen once commercial landlords are able to enforce debts again from March 25th.

Headline news last week was that the Bank of England (BoE) increased the base interest rate to 0.5%, up from 0.25% - the first back-to-back increase since 2004.

The cost of borrowing was doubled and comes as rising food and energy prices see inflation currently riding at a 30-year high of 5.4%. The BoE has warned that the cost of living crisis will hit millions of households across the UK this year, with inflation expected to further spike to 7.25% in April (well above its 2% target).

Post-tax disposable household income could fall by 2% this year, equating to the worst fall in living standards since records began. 9% of UK homeowners have mortgages that track the bank's basic rate. With the increases forecasted this year, around £26 a month will be added to repayments for these homeowners as the cost of living bites, trade association UK Finance calculates.

Ultimately, higher interest rates make borrowing more expensive. Credit cards, personal loans, and car loans are all likely to see a rise in interest rates as they are linked to the underlying base rate.

The BoE's Monetary Policy Committee also believes that the UK GDP growth forecast for 2022 should be cut from 5% to 3.75%. Looking further ahead, this growth rate is predicted to slow to 1.25% in 2023, and even more to 1% in 2024 - putting the UK more or less into standstill territory. Inflation wouldn't need to be nearly as high as it is now for that to potentially cause stagflation...

The UK government is failing to tackle economic crime. Money laundering and other forms of financial crime are made easy by the UK’s relatively lax approach to checking companies. Companies House infamously acknowledges at the top of its website that it “does not verify the accuracy of the information filed”...

Jo and Nick shine the light on Companies House and discuss why major reform is needed. The failures in tackling fraud have been brought into focus by the dramatic resignation of Lord Agnew in the House of Lords last week. A key piece of legislation, the economic crime bill, had been rejected for consideration during the next parliamentary year which prompted the resignation. The bill was expected to bring forward measures, among others, to improve almost non-existent oversight of the UK’s business register, Companies House and to increase business confidence in the UK.

Also covered in the episode are insolvency statistics for 2021. A record number of companies in England and Wales agreed with their creditors to cease trading during the final quarter of 2021, after the government tapered back its pandemic-support measures for businesses. Company insolvencies for England and Wales jumped up 11.2% to 14,048 from the previous year. The number of CVLs in the fourth quarter reached the highest since records began in 1960.