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Insolvency – The Domino Effect

Insolvency – The Domino Effect

13 July 2018:  Over a quarter (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 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% from the previous quarter.

Andrew Tate, spokesperson for R3, 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.

“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.”

To decrease the impact of someone else’s insolvency on your business you must take necessary steps to mitigate the risks.  This might include monitoring customer and supplier credit ratings, taking out credit insurance, spreading turnover amongst clients (i.e. not all eggs in one basket), and monitoring trends and market constraints.  If you feel that your company is at risk from exposure then seeking independent professional advice early on to explore your options is a must.  Don’t add to the domino effect, remove yourself from it!

BRI Business Recovery and Insolvency have been providing sound practical advice to directors, shareholders and creditors for decades, enabling us to become one of the most trusted insolvency practitioner practices.

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