A quarter of UK companies directly affected by the insolvency of another firm in the last six months

Blog Insolvency

The insolvency and restructuring trade body, R3, has found that 26 per cent of UK companies have suffered a ‘significant financial loss’ following the collapse of a customer, supplier or debtor in the last six months – creating what it calls a ‘domino effect’ further down the line.

One in ten UK companies described the financial impact of the insolvency of another business as “very negative”, while a further 16 per cent said that the effect they had experienced was “somewhat negative.”

Following the recent spate of high profile insolvencies involving large organisations, such as Carillion or Toys R Us, underlying insolvencies climbed 13 per cent in the first quarter of the year.

Andrew Tate, a spokesperson for R3, says: “No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises.

“In the worst-case scenario, the loss of a vital business relationship can lead to a company’s own insolvency in turn – the ‘domino effect’ in action. Recently, we have seen a string of insolvencies of high-profile companies, from Carillion to Toys R Us, which will have caused upheaval at other companies.

“After the news of the Carillion liquidation broke, for example, our members reported an immediate upsurge in requests for advice from companies with links to Carillion. Many retailers have hit the headlines as a result of their current difficulties, causing less visible struggles at other firms, such as suppliers and service providers.

“Often, the problems caused by the domino effect are ones that firms are able to weather, albeit with a hit to future turnover and profitability.

“The insolvency and restructuring profession has a role to play in helping to steady firms at risk of the domino effect, a task that would be easier with access to a more flexible set of tools, such as the business rescue ‘moratorium’ proposed by the Government back in 2016.

“Despite the help a moratorium would offer a company dealing with a sudden shock, very little real progress has been made to introduce it,” he said.

According to the study, construction businesses had been the worst affected by the domino effect, with almost half reporting a hit during the last six months

This result ties in with the latest official Government data which suggests that the construction sector has been contracting over recent quarters. Wholesale (35 per cent) and transport (33 per cent) were the next-most affected sectors by the effect of other companies collapsing.

Andrew Tate said: “The construction sector’s networks of contractors, sub-contractors, sub-sub-contractors, and so on mean that it is highly interconnected, with the impact of one insolvency rapidly affecting other firms.

“The wholesale and transport sectors are both low-margin industries exposed to the ups and downs of the retail arena in particular, while the increasing demand for just-in-time logistics leaves little margin for error in either sector.”