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Research Reveals Insolvency Domino Effect

New research has revealed that as many as 26% of UK companies have suffered a hit to their finances following the insolvency of a customer, supplier or debtor in the last six months. 

According to the research, which was conducted by R3, the insolvency and restructuring trade body, the financial impact of the insolvency of another business was described as “very negative” by 10% of respondents, and as “somewhat negative” by 16%.

The figures are evidence of the so-called ‘domino effect’, where one company’s insolvency will increase the insolvency risk for others.

In Q1 2018, following a spate of high profile insolvencies involving large companies such as Carillion or Toys R Us, underlying insolvencies climbed 13% from the previous quarter.

“No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises,” explained Andrew Tate, 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. Recently, we have seen a string of insolvencies of high-profile companies, from Carillion to Toys R Us, which will have caused upheaval at other companies.”

“Often, the problems caused by the domino effect are ones that firms are able to weather, albeit with a hit to future turnover and profitability,” he added. “The insolvency and restructuring profession has a role to play in helping to steady firms at risk of the domino effect, a task that would be easier with access to a more flexible set of tools, such as the business rescue ‘moratorium’ proposed by the Government back in 2016. Despite the help a moratorium would offer a company dealing with a sudden shock, very little real progress has been made to introduce it.”

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