Rise in company closures not a cause for panic

Company closures in England and Wales jumped 40% year-on-year last month to the highest level since monthly records began in January 2019, government data showed on Friday.

That doesn't sound great, does it?

In May, 2,552 companies were shut down, largely through creditors' voluntary liquidations (CVLs). This is where a company's directors agree to wind up the business without the need for a court order. However, the government's Insolvency Service also said there had been a 34% increase in compulsory liquidations, partly due to more requests from HMRC to recover funds from companies unable to pay their tax bill.

But is it as bad as it seems?

Insolvencies in Britain were low during the COVID-19 pandemic because of the £80 billion government loan programme and a temporary bar on court-ordered liquidations. However, with those protections gone, the numbers have risen since, hitting a 13-year high in the final quarter of 2022 and staying close to that in the first quarter of 2023.

Separate analysis by Mazars shows that the number of online shops going into liquidation jumped by 53% in the year to the end of April, with 532 online retailers shutting their virtual doors.

Digging deeper into the numbers, Mazars said many of the closed firms were very small businesses, noting that they were often side hustles that hadn't expanded into anything more.

The government data would seem to confirm this. While the CVL line is certainly up, the number of compulsory liquidations is only back to the level it was pre-pandemic in late 2019.

So, as much as trading conditions are tough for many businesses and some will unfortunately fail, what we could be seeing in the headline grabbing data is simply a tidying up of the portfolio as one time entrepreneurs return to a more normal lifestyle. No real harm is being done to creditors, lenders and the economy at large in the vast majority of these closures.

Talk isn't cheap

With The Bank of England expected to deliver its thirteenth consecutive hike in borrowing costs this week, a move that could take the base rate to 5%, there will be a lot of nervousness and a lot of commentary about tipping businesses over the edge.

Yes, it's a real risk, but let's not talk ourselves into a recession.


Photo by Tim Mossholder on Unsplash

Rise in company closures not a cause for panic

By: Neil Edwards

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