Latest figures show combined corporate and personal insolvencies hit a 30-year high in 2023 for England and Wales, with initial estimates for 2024 placing them at all-time highs. Using plain English, we explore the link between business failure and interest rates, then discuss how the seemingly inevitable might be avoided.
A Brief History of Insolvency Rates Vs Interest Rates
If you place the number of insolvencies side by side with interest rates, the shapes of both graphs share few obvious similarities. Look closer, and you’ll notice the peaks and troughs of insolvencies happen with a time lag on either side of sharp interest rate fluctuations, with the intervening periods looking more like an electrocardiogram graph than a measurement of economic health.
Corporate Insolvency: Banks, borrowers, and businesses all had a tough start to the 1980s, with inflation starting the decade at 17.97%. Interest rates peaked in January 1985 at 13.88% which saw a then all-time corporate insolvency high of 14,898 before the year was out. The next insolvency peak was just after the recession when, in 1992, some 24,425 companies lost their footing on either side of Norman Lamont’s Black Wednesday when Britain crashed out of the ERM. This was against the backdrop of falling interest rates. The intervening decade saw a steady rate of insolvencies until 2002 when they peaked at 16,306 following on going uncertainly after the millennium’s dot com crash.
In 2009, as the Great Recession ended with sub-2 % interest rates, insolvencies peaked again at 19,077. Insolvency rates declined sharply at the pandemic’s onset because of government business support schemes. With the interest rate brakes off in 2021, prompting 13 consecutive base rate rises, 22,123 firms hit the wall in 2022, not helped by a 32-year inflation high of 7.92%. The recession of 2023 brought corporate insolvency to a record high of 25,158.
A worldwide post-pandemic surge in inflation and the ensuing cost of living (and cost of doing business) crisis has done little to curb financial pressures. Whilst the sheer number of insolvencies appears alarming, the number of firms in the economy has never been higher. As a percentage of businesses failing, 2022 and 2023 have only been trumped by the Great Recession of 2008-2009.
Personal Insolvency: Partly attributable to Black Wednesday, personal insolvencies breached 36,000 in 1992 for the first time in history. During the period 2006-2013, personal insolvencies never fell below 100,000, topping out at 135,045 in 2010, which remains a record high. For the same period interest rates peaked at 5.75% in 2007 followed by a steady decent to the end of the Credit Crunch before going sub 1% in 2009 for the next 13 years.
Since another peak in 2019 of 122,149, personal insolvencies have steadily declined, although stubbornly keeping above 100,000 for 2023. Given the number of people is always going to be greater than the number of businesses, it makes sense that personal insolvency figures are typically higher than corporate. The only time that has not been true is the period 1977-1990, when interest rates remained high and averaged out at 11.06%. Those 13 years saw a 60/40 percentage split between companies and individuals, respectively. In recent times the split is consistently around 20/80.
Contrary to popular opinion, debt collectors don’t salivate at the thought of recession! Economic downturns do see a rise in debt recovery cases, but this is offset by higher insolvency rates.
Insolvency Crossroads
Insolvency tends to happen in one of two ways. The first is a company not being able to pay its debts as and when they fall due (cashflow insolvency), and the second is having more liabilities than assets (balance sheet insolvency). An increasing number of companies are declaring both cashflow and balance sheet insolvency in their obituaries. In the world of debt recovery, winding up petitions are primarily issued for cashflow insolvency and are pursuant to the provisions of Section 123(1)(e) of the Insolvency Act 1986. Cashflow insolvency is easier to fall in to and easier to remedy by selling assets but is dependent on realisations happening fast enough to appease creditors! Without prompt action, balance sheet insolvency can have legal repercussions. Trading whilst insolvent leaves the directors open to civil and potentially criminal prosecution. Scroll through any of the 25,158 insolvencies from 2023 and you’ll see cashflow, debt costs and industry decline as the most common reasons for folding. In descending order, the industries which saw the most insolvencies during 2023 were construction making up 18%, wholesale retail and trade at 16% of insolvencies, followed by hospitality accounting for 15%.
Broken Halo
When the likes of Body Shop hit the headlines for all the wrong reasons, it’s easy to forget the majority of insolvencies are SMEs and not your blockbuster brands. It’s the entrepreneurs, the family run dynasties, and the local halo businesses who hit the wall in vast numbers and in virtual radio silence. It is in those businesses where the impact of rising costs and reduced margins hit hardest. The shockwave of business failure is felt through the next generation; imagine remembering the time when ‘Dad went bust and us kids tried to avoid friends seeing us use the foodbank’. Insolvency really is brutal.
Unfair Comparisons
Higher interest rates mean companies cannot borrow their way out of the economic downturn or afford to invest in new revenue streams. Granted a 5.25% interest rate is low in comparison to most of history, most notably the period 1975-2001 but that does not support a minority view in the retired generation claiming their successors are crying wolf; and it certainly it doesn’t prove our predecessors had a free ride either. The economies of yesterday, today, and tomorrow are economies of different times, spinning the plates of different market strengths, weaknesses, and opportunities. For the same reason one cannot compare Yoda to Shakespeare, the economy of today is equally different to that of its predecessors.
Fall from Grace
Well-known household names like Lloyds Pharmacy and Wilko are either emerging from insolvency as dot coms or being absorbed into existing retailers, living life as an in-house brand. In November 2023, Pontins unexpectedly shut their Prestatyn and Camber Sands holiday parks because of a lack of demand. It’s thought the sites will either be mothballed for better times or sold off to strengthen the holiday firm’s balance sheet. Gig-economy operator Shift bought beleaguered mixed freight firm Tuffnells out of administration in 2023 and saved Yodel from the same fate in 2024. Both Tuffnells and Yodel are now free of the debt that cast the Insolvency Reaper’s shadow.
Amongst insolvencies since 2022, there are common themes – cash flow, rising debt costs, industry decline, and the wider cost of doing business crisis ratcheting up wages and supply costs in tandem. Larger businesses are more likely to enter administration and be saved through a buyout or Company Voluntary Arrangement. SMEs are less attractive for rescue deals and more likely to find themselves entering liquidation instead. For some, having made it through the pandemic and now finding growth to be slow or stalling, it is better to enter liquidation voluntarily instead of being forced to when the chokeholds of cashflow, debt servicing and inflation starve the business of its lifeblood. The peak of corporate insolvencies may not be over yet, with initial estimates for 2024 breaching 28,000.
In business as in life, it may get worse before it gets better. That’s why so many clients are taking pre-emptive action and instructing Advocate Commercial Debt Recovery to avoid the chokehold of cash flow, which is literally squeezing the life out of otherwise viable businesses. The seemingly inevitable may well be avoidable after all!