The UK economy finds itself edging even closer to an insolvency crisis, with businesses across various sectors facing significant challenges. Recent data from Begbies Traynor Group, the business recovery and corporate restructuring consultancy, indicates a 25.9% surge in critical financial distress during the fourth quarter of 2023. This puts over 47,000 UK businesses at risk of collapse. Particularly vulnerable economic sectors include construction, real estate, and support services, with nearly 30% of all businesses in critical financial distress in the face of higher interest rates, resilient inflation, and weaker consumer confidence. 

This comes against a backdrop of 2023, which saw the highest number of UK insolvencies since 1993 (more than 25,000, according to the Office for National Statistics), including such well-known names as Wilko, Le Pain Quotidien and Paperchase. The rise, according to UK Insolvency Service data, is partly attributed to the ending of government Covid-19 support schemes, accumulated post-pandemic debt, and inflation hurting demand. The rise in insolvencies has also impacted the accommodation and food service, wholesale and retail trade, and manufacturing sectors, which have struggled with weak demand and higher energy and labour costs. 2024 has already seen The Body Shop call in administrators in mid-February and Ted Baker preparing to seek their assistance in March.

Local authorities in distress 

Local authorities are being engulfed by the unprecedented rise in town hall bankruptcies. Council leaders warn of a deluge in so-called “Section 114” notices being issued in the coming months as funding fails to keep pace with inflationary costs and exploding demand for child protection, adult social care, and homelessness services. According to a Local Government Association (LGA) survey, nearly one in five council bosses believe it is “fairly or very likely” that they will issue financial warnings in the next 15 months. Indeed, the cross-party Levelling Up, Housing and Communities (LUHC) Committee published a report in February 2024 calling on the UK Government to fix the £4 billion hole in council funding arrangements for 2024-25 or risk severe impact to council services and the prospect of further councils facing bankruptcy. Elsewhere in the UK, the Convention of Scottish Local Authorities warned in December that unless funding from the Scottish government is improved, bankruptcies could soar among association members. 

Some UK businesses are trying to turn the current headwinds into an opportunity to drive change. The Road Haulage Association, for example, is urging the UK government to offer support to slow cost hikes and boost the economy. It has called for an emissions-linked rebate to help operators switch to low-carbon fuels and continuing the freeze on diesel fuel duty. Additionally, it has recommended a reform of the apprenticeship levy to help companies recruit and train new drivers and mechanics cost-effectively. 

Exploring restructuring options 

However, in the face of mounting financial distress, companies see few opportunities. Most find themselves on the lookout for indicators of insolvency and are grappling with management decisions and legal milestones associated with debt restructuring and administration. These milestones necessitate the utmost consistency, care, and control in communication efforts. It is at the point of financial restructuring that effective communication can have the most impact. 

Communication in the face of financial distress 

Clear and open communication, internally and externally, is crucial at this stage. Businesses must articulate their restructuring options to employees, addressing potential job or departmental changes, to protect their reputation, maintain confidence, and preserve both operations and morale. As media interest heightens, transparent and proactive engagement with specialist restructuring media and national media, where relevant, is essential. This presents an opportunity to emphasize the company’s commitment to addressing its financial situation, protecting stakeholders’ interests, and reassuring investors, suppliers, and customers. 

In some cases, distressed UK companies may consider pre-pack administration, a process wherein the sale of the company’s business or assets is negotiated and agreed upon before administration entry and completed by the administrator immediately post-appointment. This approach can provide a quicker and more cost-effective means to rescue a business and preserve jobs. These situations, however, demand intricate communication balancing acts, with management needing to convey the appropriate detail and tone on negotiations with potential buyers, changes to the company structure, or other significant developments to employees, investors, and customers, while simultaneously engaging with the media to address misconceptions or concerns. 

Although no panacea, effective communication invariably makes restructurings smoother and easier to navigate and fuels the likelihood of success. Communication helps maintain trust, reduce nervousness, sustain continuity and optimism, and pave the way for the best possible outcome. As the UK insolvency mess unfolds, companies and leaders who communicate most effectively are likely to weather the crisis most successfully.