Member Article

One in four Yorkshire companies hit by domino effect of another company’s insolvency in last six months

Over a quarter (26%) of companies in Yorkshire and the Humber have suffered a hit to their finances following the insolvency of a customer, supplier or debtor in the last six months, according to new indicative research from R3, the insolvency and restructuring trade body.

The research indicated the financial impact of the insolvency of another business was described as having been “very negative” by 12% of companies in the region, and as “somewhat negative” by 14%.

The figures, which are reflected across the UK as a whole, 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 and Toys R Us, underlying insolvencies climbed 13% from the previous quarter.

Eleanor Temple, chair of R3 in Yorkshire and barrister at Kings Chambers in Leeds, 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.”

Ms Temple continues: “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.”

In Yorkshire and the Humber, around 17% of firms said the insolvency of a counterpart had not had a material impact on their business, with just over a third (36%) reporting that none of their suppliers, customers or debtors had entered an insolvency procedure in the past year.

Eleanor Temple adds: “Any smart business knows it needs to mitigate risks due to insolvency in its supply chain or its customers through active monitoring of partners’ credit profiles, diversification where possible to spread risk, and through building strong relationships that can provide support when a major counterparty hits a rough patch.

“If your business hears that a partner is in financial distress or is insolvent, calculate your potential exposure and seek expert advice immediately if it will be significant. You could also look to the possible upsides: could buying the distressed business help your own business? Can you pick up any new contracts or customers? Counterparty insolvency is likely to affect every business out there at some point so prepare as best you can, with a contingency plan in place.”

This was posted in Bdaily's Members' News section by Emma Kilmurray .