Under pressure: Key trends in Scottish insolvencies

With all the talk of the cost of living crisis, foreign unrest pushing up the cost of petrol and diesel and domestic political instability, it might come as a surprise to hear that overall, Scottish insolvency numbers remain stable. In fact, company insolvency numbers have remained relatively flat since 2023.

The statistics of course only tell one side of the story. They don’t reflect the companies who have entered into a restructuring process, come to arrangements with their creditors or have simply closed their doors without going through a formal insolvency process. What they do however signal is sector-specific strain rather than an across the board increase in business failure.

The industries facing elevated pressures and featuring more heavily in the statistics are construction, real estate and related activities. The reasons why are no doubt multi-faceted but they are all capital intensive, cash-flow sensitive sectors where rising costs are quickly felt and erode what have become thin margins.

Construction has seen a number of high profile casualties in recent years. The industry faces the perfect storm of pricing work months or years in advance (often on fixed-price contracts), with little protection against the rising cost of labour, materials, energy or transport. Couple that with a supply chain that has become less reliable due to global events, a shortage of skilled workers and wage inflation.

Domestic house builders are particularly vulnerable as they react to consumer pressures. Home buyers are currently facing concerns around growing unemployment, increases to mortgage lending rates after a long period of very cheap borrowing, and the general rise in cost of food, energy and transport. All these factors have impacted on the sale of new houses. 

Smaller contractors and sub-contractors face even greater pressures as often they don’t have the same cash buffers to ride out dips in the market and less bargaining power. 

The real estate market has been under sustained pressure for a long time, brought to a head by COVID and a global re-evaluation of the need for and purpose of office space. While things are improving as workers spend more time in the office, companies no longer require the same amount of space.  

The reduction in demand, higher borrowing costs, falling or stagnant capital and rental values, and tenant failures, make some businesses unsustainable.

While it may sound all doom and gloom, encouragement should be taken from insolvency numbers being largely stagnant. Undoubtedly some sections are facing more pressures and challenges than others, and those sections should be particularly alive to obtaining advice early.

Many businesses seek advice too late. By that time the ability to restructure or refinance has been taken off table and pressure from creditors often dictates the outcome. 

Any business experiencing financial difficulties or who foresees a problem looming should seek advice as soon as possible from an insolvency practitioner or solicitor specialising in restructuring. The earlier advice is sought, the wider the range of solutions available.

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