One in four companies hit by ‘domino effect’ of another’s insolvency

Some 26% 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 from R3, the insolvency and restructuring trade body.

The research 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 trade body has described this as a ‘domino effect’, where one company’s insolvency increased the insolvency risk for others.

In Q1 2018, following a spate of high profile insolvencies involving large companies such as Carillion and Toys R Us, underlying insolvencies climbed 13% from the previous quarter.

R3 said that following the liquidation of Carillion, its members saw an upsurge in requests for advice from companies with links to the construction company, suggesting there is a significant impact on suppliers and service providers.

Medium-sized firms were the worst affected; 38% of firms with turnover of between £5m-£24.9m reported a negative impact, while the levels for smaller companies (up to £4.9m turnover) were 24%, and 30% for larger companies (with turnover of £25m+).

Some 11% of firms said the insolvency of a counterparty had not had a material impact on their business, while 47% reported that none of their suppliers, customers or debtors had entered an insolvency procedure in the past year.

Andrew Tate, spokesman for R3, 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.

“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.”

He added: “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.”