Insolvency domino effect leaves one in four firms counting the cost

One in four UK businesses has faced financial setback as a result of insolvency elsewhere in the first six months of 2018, new figures show.

According to insolvency and restructuring trade body R3, issues on the high street and the collapse of building giant Carillion were two major drivers of financial distress.

An estimated 10% of firms report “a very negative financial impact” as a result of another firm ceasing trading, labelled as the ‘domino effect’ where the collapse of one company threatens the collapse of another, while 16% report a “somewhat negative impact”.

This can result from customer, supplier or debtor insolvency, and the construction sector has been the worst hit, with 47% of firms affected.

Carillion owed billions of pounds at its point of collapse in January, with subcontractors owed in the region of £800 million.

The risk of insolvency increased for thousands of small businesses as a result, as the highly connected nature of the construction sector meant many firms were unable to avoid taking some form of financial hit.

R3’s Andrew Tate described the collapse as a “real shock to the economy” at a time when many builders were facing up to political uncertainty and a slowdown in the sector.

He suggested that businesses have to “work twice as hard” to recover from bad debts, meaning it isn’t just the initial loss of turnover that can influence their operations.

More than a third of firms in the wholesale and transport sectors were also adversely affected by insolvency elsewhere.

Previous figures from R3, released in April, show that underlying corporate insolvency rose by 13% between January and March on a quarter by quarter basis.

R3 has stated that insolvency practitioners have a vital role to play in helping to stabilise firms that are at risk of insolvency via the domino effect, and those fearing financial issues should seek advice at the earliest opportunity.

Alternatively, directors wishing to fulfil the full potential of their business may wish to engage with corporate advisory services in order to develop a long‐term strategy.

By Phil Smith


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