It is far too early to tell whether business conditions for struggling UK-registered companies will soon turn the corner: inflation has eased, but not far enough for the Bank of England’s liking; the UK economy officially dipped into recession after two shrinking quarters, only to crawl back into tentative positive territory; the Government’s spring budget was greeted with no more than one cheer by business owners. One certainty, however, is that insolvencies continue to grow.
Economic reality is evidenced by the 2,102 businesses forced into insolvency in February 2024, up 17% on the same month last year and still above pandemic levels. The vast majority (81%) were Creditors Voluntary Liquidations (CVLs) – directors throwing in the towel while they could still make the decision. Compulsory liquidations eased slightly from January to 217, yet continuing the surge in winding-up petitions presented by HMRC for unpaid tax. The worst affected sectors last month were construction (295 insolvencies), hospitality including accommodation and food/beverage (262), and retail (248). Expect CVLs to remain at pre-2020 levels for the foreseeable future, while for others, HMRC’s Covid-related forbearance continues to fade from memory. Administrations rose 54% to 166.
Individuals operating close to the financial edge may face the same fate. There were 10,136 insolvencies in February 2024, 23% higher year-on-year, driven by increases in numbers of DROs, bankruptcies and IVAs.
All debtors, business and personal, must be proactive in seeking advice and engaging with creditors:
- Explore and exhaust all possible restructuring options before reaching for a CVL – your business may be capable of gaining a second wind, with the right breathing space
- Stay on the front foot with HMRC. Engage and explore a time to pay arrangement. Being unresponsive only aggravates tax authorities and hastens legal action
- Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
- Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.
- For personal debtors, explore the Debt Respite Scheme to allow time to address your situation. Information on this, as well as debt support for those in poor mental health, is available here.
Dealing with significant creditors, such as HMRC, banks and landlords, is a complex process to be navigated carefully. Businesses negotiating with these parties might consider professional advice and representation.
Ted Baker spells further blow to High Street
The latest movie about Napoleon doesn’t feature the apocryphal ‘insult’ calling England a nation of shopkeepers. Perhaps the idea is it a bit of a stretch these days, if the relentless woe in the retail sector is an indication of things to come.
High Street fashion chain Ted Baker is the latest casualty this month, issuing a Notice of Intention to Appoint Administrators. Several years of instability, including accounting errors and a profit warning, were compounded by an ill-starred venture with a Dutch partner. The NOI followed shortly after beauty and cosmetics chain The Body Shop entered administration.
Many of the problems encountered by these two businesses are shared with the wider sector. The Centre for Retail says that almost 120,000 retail employees lost their jobs throughout 2023 amid the closure of over 10,000 shops. It says the tipping point for many was the biggest tax increase in 33 years last April of 2023. There have also been soaring energy costs, wage demands and other elements of cost inflation. However, the retail sector has been undergoing major structural change since well before Covid closed stores for months and turned already thin margins into losses.
The High Street’s death by a thousand cuts is symptomatic of seismic change in many consumer sectors, an ongoing shift in shopping patterns that will continue to remove capacity from the town centres until retailers take drastic steps to adapt to the new order. Retailers will continue to shrink unless they provide an engaging in-store experience for millennial consumers who have almost grown up shopping online. Most of these need a very good reason to venture beyond their front doors to partake in discretionary shopping as a leisure activity.
Throw in high rents, business rates, data security, investment in store technology, price wars and permanent ‘Sale’ periods, not to mention logistics and the presently disjointed supply chain, and it’s clear that business owners and management teams are having to keep moving just to stand still.
Operators in this tough sector, from owner-managed single store units to national chains, must develop creative and flexible strategies to protect themselves from seemingly endless volatility. In that way they might stand a chance of succeeding when trading environments become more benign. Retailers should, sooner rather than later, seek professional advice on tenancy and rent issues, store closures, stock control and working capital, technology and operating efficiencies, relationships with suppliers, and support with banking arrangements.
The insolvency toolkit offers several options for breathing space to put retail businesses on a sounder footing. Managers wishing to explore these shouldn’t hesitate to get in touch with us for a free initial consultation.
Businesses unprepared for cybercrime
Encouraged by this country’s research at the cutting edge of Artificial Intelligence (AI), the government wants the UK to become an ‘AI Superpower’ within 10 years. However, new research by Microsoft has found that 87% of UK businesses are unprepared for the age of AI because of their vulnerability to cyberattacks. Apparently just 13% of UK businesses can be described as ‘resilient’ to cybercrime, putting over three quarters of firms at a higher risk of disastrous and costly ransomware attacks.
Desperate economic times in recent years have inevitably led to desperate behaviours in business, not only from seasoned criminals sensing an opportunity in economic turbulence, but also from newcomers to white collar crime who have no other means of accessing large funds quickly. Highly experienced in fraud and forensics, we at Buchler Phillips are not surprised to have seen in recent times the sorts of ‘internal’ challenges that often present themselves when time get tough. These are typically the result of director malfeasance with the aim of diverting funds: false accounting; aggressive invoicing and booking of revenue; inaccurate valuations; recovering funds from former members of a company; dereliction of duties; and reviewing business controls.
However, in an increasingly digital world, the threat from external fraudsters to all sizes of businesses has never been greater – and this has been amplified by home working and disjointed office environments since the pandemic: it is increasingly common for frauds to be committed by employees with technological help from outsiders.
The growing digital-first approach of both consumers and business customers presents significant risk to companies. Fraudsters are finding new and innovative ways to commit fraud and steal individuals’ identities, personal details and, ultimately, their money. Consumers expect to be protected by the companies they transact with, while those companies in turn face unwelcome assaults from digital criminals.
Here are some areas that businesses from SMEs to larger concerns need to watch out for. They are very real and our consultants have had first-hand experience of these with business clients in recent times:
- Cryptocurrency scams – unregulated financial services providers offering to facilitate business transactions in cryptocurrency with claims of significant monetary benefit
- Ransomware attacks – criminals not only asking for ransom to be a paid but potentially then stealing and releasing hacked data; an entire new sector of cyber ransom negotiators is developing
- Text and cold-calling scams – receiving a cold call or text message claiming to be a genuine organisation asking for a payment to be authorised relies on a small business to be panicked into complying, usually if a relatively minor amount is involved
- New ways of authentication – passwords controlled by individuals within companies may be guessed by fraudsters researching their social media. Knowledge-based Authentication (KBA) is far from fool proof and moves towards biometrics and other ID should be accelerated
- New business account opening – two areas are particularly prevalent: ‘bust out’ account opening, where challenged businesses which already have an account with a financial provider knowingly open a further account or credit card with no intention of repaying; or simply falsifying information on an application to access more borrowing or favourable terms. The same principle applies to new credit lines or trade accounts with suppliers.
Business owners already reviewing the potential for cost-effective digitisation must consider ransomware, Know Your Customer/Client (KYC) processes and authentication systems as imperative investments. Those handling third-party data risk serious reputational damage, with customers happy to move to companies which they believe are better able to handle their information in a safe and secure way.
Navigating the maze of interim workers
Non-permanent or interim staff at all levels may present a solution to one of the largest cost concerns for UK businesses, especially SMEs. In the post-Covid economy, many employers are turning to the interim market for all aspects of labour, from large special projects such as transformation and restructuring, to isolated skills gaps.
Of course, there is a wider picture to consider. More than a fifth of working-age adults in the UK are deemed not to be actively looking for work, government figures suggest. The UK’s economic inactivity rate was 21.8% between November and January, marginally higher than a year earlier. That means 9.2 million people aged between 16 and 64 in the UK are not in work, nor looking for a job. The total figure is more than 700,000 higher than before the pandemic, raising concerns over worker shortages affecting the UK economy.
Economically inactive people are usually outside the workforce either because they are students, have retired or are suffering from long-term illness. Work patterns and career priorities have been changed by Covid’s disruption to ‘normal’ working life. Retaining and recruiting permanent skilled staff is increasingly challenging and, regardless of motivations cited by employees, financial incentives remain the strongest tools for attracting talent and slowing staff turnover.
The main alternative is attempting to recruit from a wider pool. This applies not only to executive and skilled positions, but to the less skilled end of the workforce, where relatively cheap permanent labour is no longer readily available. Both these tightening factors in the labour market have added to a wage spiral and have been compounded by the effects of Brexit on labour supply at all levels. The potential for valuable working capital to be impacted adversely by recruitment issues is very real.
Whether hiring interim, casual, freelance, agency staff or consultants, SMEs must be aware of all relevant tax and legal issues for flexible employment. While the prospect of short term cost savings may appear very appealing, particularly while interim rates remain competitive, the potential for incorrect compliance and lack of business continuity may lead managers to review staffing needs more carefully. Businesses should take appropriate professional advice on navigating this maze and its effects on cashflow to help optimise the benefits of flexible labour.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
Let’s get to work!
About Buchler Phillips
Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms.
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.