Business registrations and insolvencies on the rise
A wave of post-covid entrepreneurism swept across the UK in the immediate aftermath of the Covid pandemic, with a 32% increase in company registrations between April 2021 and April 2023. It was matched too by a sharp 37% increase in company dissolutions, which should serve as a reminder of the responsibilities of company directors.
In the last 12 months (between April 2022 and April 2023), there were over 1.6 million new company registrations in the UK together with almost 580,000 company dissolutions. Whilst it should of course be recognised that company registrations and dissolutions do not necessarily mean new businesses or business failures, the data does provide an interesting snapshot of the optimism and problems facing businesses.
New business starts
Hillier Hopkins draws most of its clients from Buckinghamshire, Hertfordshire and London. It is perhaps no surprise that the majority of business registrations are in central London. But both Buckinghamshire and Hertfordshire have seen sizeable increases in the past 12 months – a 11% increase to 20,411 registration and a 10% increase to 30,007 registrations respectively. It points to a continued wave of entrepreneurialism as individuals look to build a business that will hopefully grow and flourish.
There are many challenges facing a new business, made that much harder in recent months with soaring inflation, rising interest rates, increased energy costs and a cost-of-living crisis that is pushing up wages. It has never been more important to keep on top of the business always with an eye on cash flow.
Businesses, whether new or scaling up, will need to have effective business plans and forecasts, backed up by good financial reporting. In an uncertain economic environment, those forecasts should include different financial scenarios and their impact so they can plan and prepare in advance.
Business dissolutions
The number of business dissolutions is also highest in central London, but with increases too in Buckinghamshire (up 8% to 8,462). Hertfordshire bucks this trend with a fall in company dissolutions, falling 6% to 12,517. However, these numbers deserve further investigation. Not every dissolution is a failed business.
The Government’s Insolvency Service reports records 22,109 company failures in 2022, a 57% increase on the previous year. The data also points to the highest number of creditor voluntary liquidations (CVL) since the 1960s. A CVL, typically initiated by the company directors, is an official procedure to liquidate a company’s assets to pay its creditors.
This increase in failed companies is not entirely unexpected. Businesses irrespective of their financial health received considerable government support in 2020 and 2021 that, arguably, allowed them to continue to trade where in more normal circumstances they would have folded.
The responsibilities of directors change when a company is believed to be insolvent to the interests of creditors. Whilst it is not always obvious that a company is insolvent, it is broadly accepted that the greater the risk of insolvency the greater the directors’ duties to creditors.
Directors need also to be aware of the wrongful trading rules, where they continue to trade knowing that they had little or no chance of recovering to a solvent position. Where a director has been found to be trading whilst insolvent, they can be personally liable for those costs. Careful attention should be given to the preferential treatment of one creditor over another, taking an excessively large salary or bonus, and transferring assets out of the business.
Take early advice
Where directors believe they may be struggling or expect financial difficulties in the near future, perhaps because of the loss of a key client or the increased cost of borrowing, they should take advice early. The rule of thumb is that the earlier a director acts, the more options will be open.
Your accountant can dig deeper into the numbers and financial health of a business and make recommendations on where action can be taken. Businesses with Covid borrowing can, for example, restructure that debt over longer periods of time easing cash flow. Repayment holidays may also be an option.
Your accountant can also flag any specialist advice that might be needed, a restructuring or insolvency specialist.
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