Company administrations hit five-year low

ADMINISTRATIONS in England and Wales have hit a five-year low, according to government statistics.

In the third quarter of the year, there were just 548 administrations, the lowest recorded level since the start of the credit crunch in 2007.

The rate of administrations has been steadily falling since a high of 2,018 in the fourth quarter of 2008.

Figures from the Insolvency Service show just 986 companies entered into administration, receivership or a company voluntary arrangement in Q3 2012, which is 21% lower than the same period a year ago.

There were 277 receiverships, 548 administrations and 161 Company Voluntary Arrangements (CVAs) for the third quarter.

However, experts in the field argue that the latest figures don’t show the full picture and that zombie businesses are being propped up by banks’ reluctance to withdraw credit facilities, which is delaying the inevitable.

Insolvency trade body R3 president and Deloitte partner Lee Manning said: “Our research shows 146,000 businesses are in fact ‘zombies’, whereby at best they are able to pay the interest on their debts but not reduce the debt itself.

“Some of these businesses have been ‘running on empty’ for quite some time now, and with no reserves left in the tank, they may not be able to carry on for much longer.”

His views are echoed by insolvency expert and partner at international law firm Schultze & Braun Frank Tschentscher, who said that we are likely to see an insolvency Armageddon.

“This is the oddest recession I’ve ever seen. The apparent decrease in corporate insolvencies appears to be a positive sign for the UK economy, but is actually a false dawn. If the UK were edging out of recession, then insolvencies would rocket. Despite the administration of Comet, which is a good sign of the high-street rebalancing after decades of unsustainable growth and prosperity on the back of debt finance, the reality is that nothing will alter the big picture for a number of years,” he said.

“The reality for many British businesses is that they will continue to limp along for several years yet, but as soon as there are real signs of growth in the economy, we are likely to see an insolvency Armageddon.”

Measures by government to keep the interest rate low are also helping these zombie companies bump along, said HW Fisher & Company insolvency partner Nick O’Reilly.

“[The statistics] fail to show the pressure which has built up in the system, as thousands of companies bump along the bottom, kept alive only by low interest rates, and frequently by their owners pumping personal savings into them,” he said.

“We’re routinely seeing struggling companies taking on work at below cost, simply to keep the cash coming in. But this is only delaying the inevitable.”

PKF insolvency partner Bryan Jackson also argues that these low figures are not an indication of normal economic behaviour as pre-recession company administrations are usually at higher levels.

“Prior to the recession, the quarterly corporate failure rate was almost 1,000 businesses, fewer than now so it is important not to simply accept this fall as a positive sign that recovery is on the way,” he said.

“There remain many factors which are suppressing the corporate failure rate, including low interest rates, a relatively benign approach from lenders who are keen not to close businesses when they have a lot to lose, and business owners who are ploughing in years of cash reserves to keep their businesses afloat.”

Liquidations and creditors’ voluntary liquidations also decreased to 3,971 – a 2.8% drop on the previous quarter and 6.6% less than the same period a year ago. 

PwC partner Mike Jervis, recently appointed to London black cab manufacturer Manganese Bronze, gave his prediction for the new year. 

“We expect these lower levels of insolvencies to continue into the new year,” he said. “However, what happens after that depends crucially on the confidence of the consumer and the approach taken by the so-called ‘zombie’ companies to rectify their balance sheets.”