Insolvencies skyrocket again

Insolvency Service figures have shown that UK businesses are being battered
to an extent not seen since the recession of the early 1990’s.

There were 4,941 liquidations across England and Wales in the first quarter
of 2009 on a seasonally adjusted basis.

This was an an increase of 56.0% on the same period a year ago.

1,579 compulsory liquidations took place up, 43.6% on Q1 2009. 3,362 creditor
groups had voluntary liquidation petitions granted, 62.5% higher than Q1 2009
and 10% up on Q4 2008.

On a seasonally adjusted basis, the numbers of corporate insolvencies
(receiverships, administrations and company voluntary arrangements) in the first
quarter of 2009 has risen by 43.6% over the same period last year, the
Insolvency Service said.

29,774 people went through bankruptcy procedures in England and Wales in the
first three months of the year on a seasonally adjusted basis. This was an
increase of 1.6% on the previous quarter and an increase of 19.0% on the same
period a year ago.

This was made up of 19,062 bankruptcies and 23.4% on the corresponding
quarter of the previous year), and 10,713 Individual Voluntary Arrangements
(IVAs), (which were up 3.6% on the previous quarter and 11.8% on the
corresponding quarter of the previous year).

Stephen Speed, Chief Executive of the department said:

‘Insolvency procedures exist to provide debt relief for insolvent companies
and individuals enabling them to make a fresh start and regularise their
financial position. However insolvency procedures do have serious consequences
and can have far-reaching implications for directors and individuals.

‘It is important that the public can have confidence that corporate
insolvency procedures are not open to abuse. Where company directors are found
to have been guilty of misconduct they can be disqualified from acting as a
director in the future. Currently, some seven directors a day are disqualified
as a result of investigations conducted by the Insolvency Service. In the last
quarter, 59 directors were disqualified for 10 years or more – a very serious
sanction.’

In the wake of major business collapses including Land of Leather, Woolworths
and Waterford Wedgwood the government announced in Budget 2009 that the
Insolvency Service would consult in June on measures aimed at further improving
the ability of companies to seek rescue through administration and CVAs.

But industry experts have warned that comapnies had not seen the worst of the
financial storm.

Richard Fleming, UK Head of Restructuring at KPMG, said:

‘Unfortunately we are seeing companies with nowhere else to go failing as
their backers, realising that they are throwing good money after bad, snap the
purse closed.

‘The financial sticking plasters which were applied to struggling companies
when liquidity was still available are now coming away and lenders are unwilling
to reapply them.

‘We expect to see the rate of insolvencies gathering pace over the coming
months as the Darwinian theory takes effect in the corporate world.
Interestingly the CVA figures are down by 12% this quarter but this could change
with the approval of the JJB CVA. We may now see more compromise deals being
struck between companies and their creditors to avoid insolvency.’

Graham Rusling, Managing Director for Business Support and Recoveries, at
Barclays commercial divsion said:

‘We expect administration numbers will continue to remain high even after it
is confirmed that the UK is in recovery, as these numbers have tended to lag
behind almost every other economic indicator.

‘However, it is important to remember that the majority of businesses working
through an administration will still continue trading in some form at least,
with the goal of retaining staff and protecting shareholder value.

‘It is crucial that those companies that sense major challenges ahead
communicate this to business partners including their bank as early as po
ssible, which will offer the greatest flexibility in how these challenges are
met, in many cases avoiding administration altogether.’

Alan Tomlinson of UK licensed insolvency practitioners, Tomlinsons, which
specialises in the smaller companies which form the bedrock of the UK economy
said:

‘Today’s statistics firmly squash the notion that there are any green shoots
of recovery out there. The number of company failures is significantly up on
last year and each one contributes to the overall domino effect. At the same
time, many directors are unable to start again due to difficulties obtaining new
finance and so for many of these businesses, the situation is terminal.

‘Since last autumn many of the companies we are seeing have suffered
significant drops in turnover that they have been unable to replace. Without the
reserves needed to ride out their current difficulties, these companies are
going under with all the ramifications for the economy that this entails, such
as increased unemployment. I simply cannot foresee there being a slowdown in the
rate of company insolvencies until the middle of next year.’

Further reading:

Insolvency
stats are the tip of the iceberg, warns PwC’s Jervis