Sharp rise in companies collapsing as costs soar

Less than a week after abandoning its plan to split itself into separate audit and consulting businesses, EY has told staff it will cut 3,000 jobs in the United States to eliminate “overcapacity”.

Company administrations jumped in the first half of the year as the rising tide of inflation and interest rates claimed more corporate casualties.

They increased by 44 per cent from 429 to 618 as inflation put pressure on balance sheets, according to data from the restructuring firm Kroll.

The food and drink sector was knocked by more administrations in the six-month period than it faced during the whole of previous year. Fifty-six businesses filed for protection from creditors, compared with 53 during 2022. Construction and manufacturing industries suffered the most acute distress overall as they were hit with 79 and 71 company administrations respectively.

Businesses have been struggling with a sharp rise in costs for labour, materials, energy and credit. The Bank of England started to increase base rates two years ago and the cost of debt is starting to feed through.

Thames Water became one of the first high-profile examples of how the increased cost of capital could affect companies with large amounts of debt. The UK’s biggest water supplier faced falling into special administration in June as it struggled to secure additional funding from investors and the regulator raised concerns about its £14 billion debt pile.

Sarah Rayment, co-head of global restructuring at Kroll, said: “This probably is going to be a continuing trend. The challenged sectors continue to be construction, manufacturing, leisure and hospitality.

“People are finding the market very difficult to predict. UK business does seem to have real resilience and stakeholders do seem to want to work together more than previously. The banks want to work with their customers and suppliers want to work with businesses.

“But there are always going to be situations where businesses fail because they have just run out of all of the resources available to them.”

Begbies Traynor told investors last week that it had benefited from a “significant increase” in higher-value administration cases as businesses struggle with rising costs.

Rayment said: “We will see the liquidation numbers increasing as well because there will be a clear-out of the zombie companies that were supported through Covid and now there is no blue sky available to them. Businesses have worked through the support measures they have seen from the government during the pandemic. They are now having to repay tax and they are having to increase wages.

“Companies fail and that is part of the cycle. If you have good management teams and they work with their stakeholders then the business may survive in a different form.”