Insolvency stats: The firms' reaction

Businesses are being advised to batten down the hatches from all quarters of the accountancy profession as the hostile economy shows no signs of letting up.

Insolvency experts were responding to the Insolvency services Q2 statistics, which reported 3,560 compulsory liquidations and creditor's voluntary liquidations in total in England and Wales in the second quarter of 2008.

This was an increase of 11.6% on the previous quarter and an increase of 15.0% on the same period a year ago.

Many businesses and consumers will continue to struggle, an even sharper rise in insolvencies in the coming quarters looks inevitable, Ernst & Young warned.

Liz Bingham, the firm's London head of restructuring said: 'The increase in corporate insolvencies is continuing a trend that we think will accelerate in late 2008 and into 2009 as companies are hit by the dual blows of a credit squeeze and mounting costs. The wider implications are already here to see and, with some sectors not so much slowing down as crashing, these are treacherous times.

Profit warnings have continued to increase into the third quarter. There were 49 profit warnings in July 2008, E&Y found, the highest July total since 2001, and 19 more than July 2007.

The firm's ITEM Club forcasted a drop in UK growth from 3.0% in 2007 to 1.5% this year and 1.0% in 2009, which will see the ability of companies to refinance their way out of trouble will continue to be severely curtailed.

Geoff Carton-Kelly, Head of Restructuring and Recovery at Baker Tilly, agreed today's rise in insolvencies would be part of a trend that will last into next year.

'We expect about 15,000 company insolvencies in 2008, 20% higher than in 2007 (12,426), at a rate of over 280 companies per week,' he said.

The mid tier firm added that a sharp drop in discretionary spending was hitting pubs, clubs and other leisure companies hard as they featured highly among those companies going in to liquidation. Property developers and associated businesseses were also finding life very challenging, Baker Tilly said.

Licensed insolvency practitioners Tomlinsons, which specialises in advising the SME sector regarded as the bedrock of the UK economy, said that the figures showed that even the more established comapnies are feeling the pinch.

Partner Alan Tomlinson said: 'The rise in receiverships is interesting and indicates that an increasing number of well-established businesses that are over five years old are suffering in the current climate.

The upward trend in company liquidations was widely anticipated given the general economic slowdown affecting the owner managed business sector.'

City lawyers Freshfields also weighed into the issue, highlighting the number of companies in administration increasing by 60% compared to the same period in 2007. 938 companies called in the administrators this quarter, up from 535 in Q2 2008.

Ken Baird, head of restructuring and insolvency at Freshfields said: ‘Market conditions are becoming tougher, especially with credit scarcer and more expensive to secure and commodity costs skyrocketing. These factors have triggered a marked downturn in fortunes across sectors with companies already walking a solvency tightrope being among the first to fall over the edge.’