Company insolvencies in England and Wales at highest level since 2009

The number of firms at risk of insolvency is on track to be the highest since the depths of the financial crisis in 2009. Data from the Insolvency Service and from insolvency firm Begbies Traynor seen by the BBC shows the number businesses in England and Wales in ‘critical financial distress’ has risen by 25% in the past three months to nearly 40,000, with company insolvencies up 10% in the quarter compared to the same period last year. The sector hardest hit is construction with almost 6,000 firms in critical financial distress. As a region, the data shows London is the hardest hit.

Construction News and Building Magazine both report on this and quote insolvency expert Julie Palmer from Begbies Traynor who says is down to a combination of higher inflation and borrowing costs twinned with weaker consumer confidence and demand. She says: ‘Businesses that had loaded up on debt at rock-bottom rates and were only able to cling on during the pandemic thanks to government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future. Taken together with stubbornly high inflation and weak consumer confidence, many of these businesses will inevitably head towards failure.’

Personnel Today covers this news too, with a focus on redundancies. They report that in September 2023, 196 employers in Great Britain submitted HR1 forms informing the government about potential redundancies, totalling 12,538 jobs. This was compared with 207 employers and 13,694 jobs in September 2022.

The hope in many of these cases is that a buyer will be found. If that happens then from a legal perspective things get a bit complicated because buying a business from an insolvent company involves a different set of rules, depending on the type of insolvency it is. TUPE may or may not apply, and even if TUPE does apply, the way it operates is modified, with limits placed on what the buyer takes over, modifications designed to attract buyers who are prepared to rescue the business. 

As you would expect, we advise both buyers and seller in these situations and, of course, HR has a key role to play. If a buyer is found things can move very fast so HR needs to be ready for that. The fallout of an insolvent purchase can be messy – unexpected employees claiming to have transferred or workers dismissed by the seller claiming they’re now the buyer’s problem. So what does HR need to do, and when does TUPE apply? They are questions I put to Ed Goodwyn who joined me by phone from the London office: 

Ed Goodwyn: “Unfortunately, it's a fact of life these days with the current market that the risk of insolvency is ever increasing and HR professionals need to be alive to the steps they ought to be taking, and thinking about taking, now to be prepared if they face that very unfortunate circumstance. The first thing to note, of course, is that hopefully, if there is insolvency proceedings, there is a sale in prospect whereby some of the business or all of the business with the employees may transfer and will be sold to another business. From a practical perspective, the HR professional needs to be alive to the speed by which these transactions take place - they can take place in a matter of days. Very often, if it's an administration, the administrator, even before appointment, will be involved within the business to see to what extent it can help get the business away quickly. So it's very important for HR to understand the nature of the speed of these things and be ready and prepared. So simple steps like making sure the HR records are all in good shape so quick and swift due diligence can be provided to any future purchaser and, in particular, looking to see to what extent there are any enhanced, or arguable enhanced, redundancy rights which will be probably front and foremost to a new employer or buyer's perspective. Another thing for HR to consider, of course, is the issue as to whether TUPE is going to apply or not. So TUPE may apply either almost in full or not at all, and it rather depends on the nature of the insolvency proceedings themselves. The first thing to say though, of course, is that the sale, if there has to be a sale, has to meet the ordinary tests under TUPE as to whether TUPE applies at all. If TUPE does apply, then one has to look to see whether it's an insolvency act by way of administration or insolvency proceedings by way of liquidation. If it's a liquidation, then most of TUPE will not apply, i.e. the employees will not TUPE transfer to the buyer. The reason for this rule under TUPE is to make these sorts of sales more attractive and therefore the employment liabilities stay with the company and don't transfer. However, the HR professional needs to understand that even though that element of TUPE does not apply, there is still an obligation to inform and consult. If the insolvency proceedings are an administration, and TUPE does apply, then most of the normal rules of TUPE will apply in the normal way. There are, however, two important exceptions. Firstly, pre-transfer liabilities and the liability for that won't transfer and will be covered by the government and the National Insurance Fund up to certain limits. Secondly, the buyer will be less constrained as to how it will be able to make changes to terms conditions of employment post transfer.”

If your business needs help in this area then please do contact Ed – he heads up the Employment infrastructure team's focus in the sector and his details are there on the screen for you. Also, worth saying, TUPE in the context of insolvency is one of the areas we cover in a basic guide to TUPE which the team has put together. That is currently available on the Out-Law website and we’ve put a link to it in the transcript of this programme for you.

LINKS
- Link to Pinsent Masons’ Basic Guide to TUPE