Corporate and personal insolvencies fall, but hide true picture

BOTH PERSONAL and corporate insolvencies fell in the last quarter of the year, according to government statistics. However, the figures fail to show a true reflection of the economy, the profession has warned.

Today’s Insolvency Service figures show company liquidations and corporate insolvency procedures declined 7.4% in Q4 2013 compared to the previous quarter – and 7.1% down on the same period in 2012.

But these numbers “fail to paint a true picture” of the UK’s financial health, warns Baker Tilly restructuring head Graham Bushby.

“Recent research from the Bank of England suggests 14% of banks’ lending to SMEs is subject to some kind of forbearance – whether in the form of loan term extensions, payment holidays, or transfers to interest only deals, so there is clearly a significant degree of distress still being felt by some businesses, despite the recent upturn in the economy.”

The latest figures also show that administrations have increased 10.7%; to 642 in the fourth quarter of 2013 compared to the same period last year, reaching a seven-quarter high since Q1 2012 of 779.

This compares with a decline in receiverships of 14.5% on the same period last year and company voluntary arrangements, which fell 18.5% compared to Q4 2012.

The decline in overall corporate administrations is an indication that banks are propping up zombie companies in the hope that they can achieve a higher return through keeping the company going. However, this is, in turn, freezing liquidity for viable businesses, according to PJG Recovery insolvency practitioner Melanie Giles.

“Not calling in their debts is tying up the banks’ liquidity and is depriving other companies of the capital they need to grow. It’s not the zombies that are rotting, but the companies of tomorrow through under-capitalisation.”

This sentiment – that the figures are not a true reflection of the business climate – was echoed by BDO restructuring partner Ian Gould. The next quarterly insolvency stats, representing Q1 2014, will illustrate what is likely to be the peak of corporate collapses in the year. The first quarterly figures represent the fallout from Christmas trading, while banking covenants sometimes relate to the end-of-year period.

Many law firms have struggled to secure professional indemnity insurance and face closure.

“Problems with obtaining professional indemnity insurance have put the nail in the coffin of over a hundred firms that were already struggling financially, forcing the individual partners to liquidate,” said Wilkins Kennedy partner Louise Brittain.

However, there is some good news for the high street, according to Deloitte restructuring partner Lee Manning, as surviving retailers have shared a bigger slice of the market after big-ticket names disappeared last year.

“The high street has undergone a re-balancing, but there will be different challenges for the year ahead. Businesses with greater working capital requirements could hit difficulties as they try to fund growth.”

Individual insolvencies also plummeted. There were 24,282 individual insolvencies in Q4 2013, a decrease of 4.3% compared to the same period in 2012.

Bankruptcies, in particular, fell 22.2% in the last quarter of 2013 to 5,386, compared to the same period in 2012 with 6,921 registered.

However, these figures are also masking what could be a much more worrying trend emerging. Non-insolvency processes such as debt management plans (DMPs) – which are arranged between a bank and individual – can continue indefinitely and are not externally monitored.

Giles Frampton, R3 vice-president, is concerned that many individuals entering a DMP or taking out a payday loan are failing to fundamentally address their debt problem.

“Until the government begins to monitor new DMPs, the true scale of personal insolvency in England & Wales will be hidden,” he said.

“The medium and long-term outlook is mixed. Consumer debt has started to climb again, while the expected rise in interest rates will very likely have a knock-on effect on insolvency numbers.”

Insolvency Service deputy CEO Graham Horne took a more positive tack, pleased at the falling figures: “Today’s statistics show that both company and personal insolvencies are down in 2013. There were 14,982 company liquidations, a decrease of 7.3% compared to 2012 and 101,049 personal insolvencies, a reduction of 7.9% compared to last year. In the final quarter of 2013 there were 7% fewer company liquidations and 4.6% fewer personal insolvencies.

“No one wants to see people and business getting into trouble and we are working to improve the insolvency regime to make sure it supports people and business in trouble while protecting creditors.”