Over a quarter of UK companies have suffered a hit to their finances following the insolvency of a customer, supplier or debtor in the last six months, according to new research.
The research found the financial impact of the insolvency of another business was described as “very negative” by one in ten UK companies, and as “somewhat negative” by 16 per cent of respondents.
The figures are evidence of the so-called ‘domino effect’, where one company’s insolvency will increase the insolvency risk for others.
In Q1 2018, following a spate of high profile insolvencies involving large companies such as Carillion or Toys R Us, underlying insolvencies climbed 13 per cent from the previous quarter.
Andrew Tate, spokesperson for R3, the business recovery association that carried out the research, 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.”
Source: Business Matters