Not out of the woods yet: our predictions for insolvency in 2025
As we enter 2025, Kelly Jordan, partner in our banking and restructuring team, reflects upon the current insolvency market and predicts what the insolvency landscape will look like during the year ahead.
The statistics
Insolvency numbers remain high for another successive year post COVID-19, with around 22,000 company insolvencies as of November 2024 and an expected annual total of around 24,000, only slightly under the 25,163 company insolvencies in 2023.
Recent challenges
In recent years, the UK economy has presented a number of challenges for businesses, including high inflation, rises in interest rates and geopolitical instability.
All of these challenges have created a difficult trading environment. Most recently, the measures introduced by the budget in November 2024, including changes to National Insurance, National Minimum Wage and reductions to business rates relief, are no doubt going to put even further strain on businesses, particularly among small and medium-sized enterprises.
The restored appetite of creditors, especially HMRC, to pursue debts more aggressively will also add pressure, potentially leading to an increased number of winding-up petitions.
Given the headwinds facing businesses it is hardly surprising that many predict insolvencies to remain at the current levels (levels not seen since the recession in 2008-2009), with some predicting even further increases.
Sectors that are likely to be hardest hit are those that are labour-intensive, including social care/care homes, retail, hospitality, leisure and construction. These businesses are most likely to be impacted by changing consumer behaviours, rising operational costs, the aforementioned changes to National Insurance and National Minimum Wage, and a reduction in disposable income.
The third sector is also at risk, with the added pressures of funding being withdrawn/reduced, the bringing of some services back into the public sector, and a squeeze in charitable donations.
Tools for insolvency practitioners
There is already a range of tools available to insolvency professionals working with distressed and insolvent businesses. It will be interesting to see how those tools are utilised, particularly in terms of rescuing and recovering of those businesses through the use of Restructuring Plans (RP), Company Voluntary Arrangements (CVAs) and pre-pack administrations.
Although RPs have become a useful tool, their effectiveness amongst SMEs remains uncertain, given the costs and complexities of the process (in fact, RPs are known as one of the most complex insolvency procedures).
As the case law around RPs evolves and the market becomes more au fait with the process, perhaps the regime will lend itself to a broader range of companies.
For now, the alternative processes are likely to remain the core options for SMEs. Despite the bad wrap that pre-packs often face, they are often the best outcome in the circumstance, and, as such, they will undoubtedly remain a useful device for all businesses.
The importance of planning ahead
Whether insolvencies rise at the rate predicted by some remains to be seen, but there will inevitably be challenging times ahead for many.
What remains key for businesses is good financial governance. It is important to keep finances under regular review and seek appropriate professional advice as soon as there are any signs of difficulty.
Early intervention and assistance from qualified insolvency professionals can be critical as it may be the difference between survival through, for example, refinance or restructuring, and another number in the insolvency statistics.
For more information, contact Kelly using 0191 211 7916 or [email protected].