Blog: Number of Scottish businesses failing halved in five years

Banks doing more to support troubled firms but Brexit uncertainties loom, writes Matt Henderson, partner and head of restructuring at Johnston Carmichael

The number of Scottish businesses failing in the face of ongoing economic challenges in the post-financial crisis era has plummeted, dropping by nearly 50 per cent since 2012.

Banks and other lenders, working hard to restore confidence after the crisis of 2008/9, have offered much more support and have done a lot more to find non-hostile consensual strategies to prop up companies in trouble giving them a far better chance of survival.

Since 2012, the insolvency market has seen biennial spikes in the number of insolvencies taking place – peaking at 1,622 that year and moving between around 880 and 1,050 in the following years.

For the 12 months to June 2017, there were 887 corporate insolvencies in Scotland – down by almost 16 per cent on the previous year’s total of 1,054. When broken down by type of insolvency, only administrations increased compared to 2016; up by approximately 6 per cent to 126.

There has been a 21 per cent increase in the number of corporate insolvencies between the first and second quarters of 2017 (rising from 182 for the 31st March quarter end to 220 for this most recent quarter to 30th June). However, when we compare the latest quarter results with the same quarter last year (there were 290 in Q2 2016) we’ve actually seen a drop of 34 per cent.

The drop in the number of corporate insolvencies being recorded since the banking crisis has occurred as a result of businesses and their lenders learning how to adapt to survive, and embracing the restructuring that must often be done to stay afloat in challenging market conditions.

It’s encouraging to see businesses are working smarter to control costs and increase efficiencies, which has been most evident in the energy sector out of Aberdeen in the last two years. In oil and gas there has been a period of sustained pressure and severe impacts on income and, in turn, the workforce. While things are improving, businesses are not out of the woods just yet.

Going forward, Scottish companies are facing access to market concerns as divorce from Europe looms, which we can expect will be compounded by access to labour restriction when freedom of movement from the continent draws to a close.

There is a heavy reliance on the availability of labour in a number of key industries in Scotland – you only have to look at berry picking in agriculture , and at Scotland’s licensed, leisure and hospitality sector to see the potential impact.

Care homes and other healthcare providers in Scotland are also heavily dependent on access to labour from the EU.

Companies already trying to control their financial commitments and increase their margins are facing an expected increase in the cost of labour. The introduction of the National Living Wage alongside rising minimum wage levels mean tight margins will get even tighter, and this will affect many sectors of Scotland’s economy.

When the restrictions on movement of people from the EU hits, attracting and retaining people from a limited skilled workforce in the country will be key to survival for everyone, and at that point wage competition will only continue to increase.

Looking at the professional and financial services sectors, there is already anecdotal talk of institutions taking their business from the UK to major European centres such as Dublin, Amsterdam and Frankfurt, drawing people out of Scotland and the UK to set themselves up for the years ahead.

The drop in the number of insolvencies is welcome news however, with relocations of this kind allegedly already being contemplated alongside the projected impacts of Brexit, it’s unlikely to be plain-sailing for businesses in the coming years.