Pressure mounts on Scottish firms as failure rate soars

Insolvency specialist Interpath Advisory, which published the figures after analysing notices in The Gazette, highlighted the impact on corporate health from cost inflation, rising interest rates and sluggish growth continue.

Interpath signalled that insolvency activity in Scotland has returned to pre-pandemic levels following record lows in 2020 and 2021, with the rate of failure comparable to the UK as a whole. A total of 315 companies in the UK fell into adminstration in the second quarter, up from 212 at the same stage last year - a rise of 48.5%.

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Circularity Scotland, the company set up to administer the crisis-hit deposit return scheme, construction equipment supplier Adastra Access, and Tayside Aviation, the Scottish flight school, were among the high-profile insolvencies seen in Scotland in the second quarter.

Blair Nimmo and Alistair McAlinden of Interpath were appointed joint administrators to Circularity Scotland after it was announced by the Scottish Government on June 7 that the DRS would be delayed until October 25 at the earliest, leaving the organisation unable to meet significant contractual obligations wthout additional funding. Talks with key stakeholders to secure further funding proved to be unsuccessful and Circularity Scotland, which employed 40 people, ceased to trade upon the appointment of the administrators on June 20.

Mr Nimmo, chief executive of Interpath Advisory said: “It’s no surprise that a sluggish economy, stubbornly high inflation and tightening monetary policy are increasing the pressure on businesses up and down the country.

“Indeed, the interest rate conundrum appears to be the number one concern for many of the businesses that we are speaking to at the moment.

"With the expectation that it will take some time before we see rates start to come back down, the overall cost of borrrowing is now hitting double figures – something which we’ve not seen in the UK for at least 15 years. This will have an impact on any business which relies on debt finance, and particularly those which are highly leveraged.

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”At the same time, companies continue to contend with rising input prices, as well as walking the wage inflation tightrope. And consumers are cutting back on discretionary spending as the impact of those 13 consecutive interest rate rises puts a squeeze on disposable income.”

Interpath noted the rising number of UK insolvencies in the second quarter could be seen across a wide range of sectors, with companies in the building and construction, food and drink and professional services experiencing a notable number of appointments. And it expects there to be increasing difficulty in the property market because of high interest rates.

Interest rates currently stand at 5%, a 15-year high, and are expected to be raised further by the Bank of England as it bids to reduce stubbornly high inflation.

But economists this week cut their forecasts for peak interest rates to a range of 5.75% to 6% by the end of the year, after official figures showed inflation increased in June at a lower rate than forecast. Annual UK consumer prices index inflation increased to 7.9% in the 12 months to June, down from 8.7% in May.

Mr McAlinden, head of Interpath Advisory in Scotland, said: “Given the recent hikes in interest rates and resultant increases in the cost of borrowing, one sector where we expect to see a marked rise in activity over the months ahead is real estate, from commercial, leisure and retail all the way through to residential.

"In particular, the long shadow cast by Covid on both the demand for and valuations of office and retail space will take some time to dissipate, potentially leaving some investors under water.”

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Meanwhile, as the number of administrations continues to rise, Interpath said recent data suggests the use of restructuring plans is also on the up. Following their introduction in the Corporate Insolvency and Governance Act 2020, a total of 20 restructuring plans have now been registered, the insolvency specialist said. These include one for Italian restaurant chain Prezzo, which was sanctioned by the High Court July 3.

Mr McAlinden said: “After somewhat slack initial take-up, it seems that use of the restructuring plan is also starting to gather momentum as companies seek to explore alternative tools within the restructuring toolkit.

"What’s particularly interesting is that while early adoption centred on large corporates, we are starting to see increasing adoption in the mid-market space now that precedent has been developed around the parameters of the process. We look forward to seeing its use in supporting the restructuring of Scottish businesses.”

Mulling the outlook for the rest of 2023, Mr Nimmo said: “The summer months often bring with them a fall in insolvency activity, but our own pipeline at Interpath suggests Q3 of this year could be just as busy as Q2. As ever, our advice to businesses is to maintain good visibility over cash inflows and outflows, identifying those pinch points, and seeking advice early if you think alarm bells might soon start to ring.”