ALMOST a quarter (24 per cent) of companies in the South East have suffered a hit to their finances following the insolvency of a customer, supplier or other debtor during the past six months, according to new research from R3, the insolvency and restructuring trade body.

The research found the financial impact of such exposures was described as “very negative” by one in ten South East companies and as “somewhat negative” by 14 per cent of respondents.

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 per cent from the previous quarter.

Mike Pavitt, Chair of R3’s Southern Committee and partner and head of the corporate restructuring and insolvency group at solicitors Paris Smith LLP, says: “Few, if any, businesses exist in isolation, and every headline-grabbing corporate insolvency will typically have consequences for numerous other enterprises. 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.

“Any smart business knows it needs to mitigate risks referable to an insolvency in its supply chain or its customers through active monitoring of partners’ credit profiles, diversification where possible to spread risk, and through building strong relationships that can provide support when a major counterparty hits a rough patch.

“If your business hears that a partner is in financial distress or is insolvent, calculate your potential exposure and seek expert advice immediately if it will be significant. You could also look to the possible upsides: could buying the distressed business help your own business? Can you pick up any new contracts or customers? Counterparty insolvency is likely to affect every business out there at some point so prepare as best you can, with a contingency plan in place.”