Insolvency ‘domino effect’ leaves one in four businesses financially exposed

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, new research has revealed.

The study, from insolvency and restructuring trade body R3, found the financial impact of the insolvency of another business was described as “very negative” by one in 10 UK companies, and as “somewhat negative” by 16% 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, underlying insolvencies climbed 13% from the previous quarter.

The Carillion case was of particular concern for the catering industry, given its own interests in the contract catering market and the number of equipment and service contractors that carried out work for it.

Meanwhile, at operator level a spate of CVAs among high-profile restaurant chains has had an inevitable slowing effect on the supply chain.

R3’s Andrew Tate said: “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.

“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.”

Mr Tate said that 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.”

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