The era of mass UK insolvencies has arrived​

By Jake Rickman​

What do you need to know this week?

The FT broke a story yesterday afternoon entitled, “UK companies fail at fastest rate since financial crisis”. The short of it is that 2022 saw the highest rate of companies entering insolvency procedures since 2009 and at a rate of 57% more insolvencies than 2021. In other words, as the president of an insolvency trade body observed, “2022 is the year the insolvency dam burst.”

Over the past year, TCLA’s commercial articles have examined the extent to which market conditions appear likely to create more insolvency circumstances for companies worldwide as well as in the UK in particular. As is often the case for business stats, metrics tracking insolvencies are backward looking and require time to compile and assess before drawing a conclusion. But it would seem that conclusion is here.

The sectors most impacted are businesses operating in the construction, retail, and hospitality areas. This is broadly in line with what analysts predicted, given that these industries have since the emergence of COVID-19 been particularly exposed to supply-chain interruptions and struggle to pass on inflated supply costs quickly enough to offset deteriorating cashflows and meet their liabilities when they come due.

But, as a restructuring strategy partner at EY noted, these economic stressors are “’deepening and spreading to all sectors of the economy as falling confidence affects investments decisions, contract renewals, and access to credit.” This is particularly worrying, as it suggests that entrenched headwinds are unlikely to dissipate anytime soon, especially in light of the International Monetary Fund’s prediction that the UK economy’s performance in the year to come will be worse than “any other country in the developed world – including Russia”, according to a Sky News report also published on Tuesday.

How is this topic relevant to law firms?

This news, taken in context, has bleak implications for the UK economy. If you can articulate what it portends and the potential stakes for businesses as well as law firms, you will signal to interviewers the extent of your commercial understanding.

Businesses with outsized exposure to the UK market will likely be more affected by the economic headwinds compared to those with less. This will have a dual impact on the appetite for businesses and investors to expand their UK operations, simply because growth prospects are better in nearly every other developed market than in the UK.

For law firms, corporate deal teams and equity capital markets teams are most likely to be impacted, as investors and businesses put plans for mergers, acquisitions, and IPOs on hold. Debt capital markets underwriters and banking clients are less likely to generate the same volume of fees as borrowers avoid opportunistic borrowing in the face of steep interest rates which increase the cost of borrowing, which will also translate to reduced fees for law firms.

On the other hand, we have discussed in the past how there are certain sectors and legal practice areas that are counter-cyclical. That is, these areas see improved fortunes while the rest of the market does poorly. For law firms, in theory, this includes restructuring and insolvency groups and financial sponsors teams which cater to distressed and special situations investment funds.

That said, most reported insolvencies throughout 2022 are likely to be micro-entities with revenues of less than £650,000 per year. Neither these entities nor their creditors are likely to instruct the largest law firms to advise them. In other words, it remains to be seen to what extent these reported insolvencies will generate sufficient fees to counteract the decline in fees in cyclical areas.

Somewhat separately, contentious practice groups may obtain a modicum of insulation from the business cycle because clients tend to pursue disputes regardless of the economic conditions. Some firms may even benefit from it. For instance, contentious restructurings and contract defaults resulting in litigation or arbitration could feasibly increase in the coming months.