Written by: Keith Tully
Reviewed: Wednesday 27th June, 2018
As many as one in four British companies have been impacted financially in the past six months by a customer, supplier or debtor entering insolvency.
That striking figure comes from research conducted by the insolvency and restructuring trade body R3, which has been investigating the extent to which one company’s entry into insolvency can have a knock on effect on others elsewhere in the same industry or in the wider economy.
R3 says it has seen an upswing in requests for insolvency advice recently in the wake of the collapse of high-profile companies including the construction services giant Carillion and retailers such as Toys R Us and Maplin.
Carillion’s entry into administration earlier this year is understood to have had a particularly notable impact on demand for insolvency advice.
However, the collapse of various high street retailers in recent months is also believed to have had a considerable, albeit “less visible”, impact on suppliers and service providers in various parts of the country, according to R3’s assessments.
“No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises,” says Andrew Tate, a spokesperson for R3.
“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.”
Mr Tate also suggests that while the impact of the ‘domino effect’ in insolvency situations will typically be overcome by the companies being affected, there are very real risks involved and significant financial challenges to be overcome in many cases.
“The insolvency and restructuring profession has a role to play in helping to steady firms at risk of the domino effect,” he said in statements associated with R3’s recent research.
In 2018, the area of the economy suffering the greatest impact of insolvency-related domino effects has been the construction sector, where 47 per cent of companies report having been hurt or hindered financially by a third-party insolvency situation during the past six months.
“The construction sector’s networks of contractors, sub-contractors, sub-sub-contractors, and so on mean that it is highly interconnected, with the impact of one insolvency rapidly affecting other firms,” said Mr Tate.