Five year low of insolvencies indicator of “fool’s paradise”

Five year low of insolvencies indicator of "fool's paradise"

Corporate insolvencies continue to decline but the implications for the economy is met with mixed-reveiews

CORPORATE INSOLVENCIES continue its downward spiral but this is just lulling companies into a “fools paradise” says HW Fisher practitioner.

The Insolvency Service figures show liquidations, including compulsory and voluntary, were down 2.5% for the third quarter of the year compared to the previous quarter and 2% down when compared to the same quarter a year ago.

However, the fall is just a false sense of security and any company that doesn’t realise this is living in a “fools paradise” according to HW Fisher & Company insolvency partner Brian Johnson.

“Business confidence might be galloping ahead, but many companies – not just the fabled zombies – continue to live in a fool’s paradise of low interest rates and bank forbearance…Such complacency about the levels of corporate insolvency would be premature at best and naive at worst…The modest overall fall in company insolvencies should not be confused with a sustainable recovery.

“That unique combination of factors will not, and cannot, last. When the banks inevitably call time on their problem loans, many businesses will find they have sleepwalked off the cliff.”

However, PwC’s insolvency partner Mike Jervis disagrees and believes the tide has turned as lenders have now changed direction and are supporting struggling businesses.

“The insolvency statistics show that larger corporate failures are now back to the levels we last saw around 2004, when the economy was growing at a faster rate than today. There is more optimism amongst parties who either run or are looking to invest in distressed companies and avoiding formal insolvency is the new norm.

“There are significant examples of forbearance in the lender market as banks continue to support businesses through turnaround techniques.”

Collectively administrations, receiverships and company voluntary arrangements have also fallen 3.8% compared to the same period a year ago.

Administrations were down 0.7% compared to the same period last year the first quarter of 2013 saw 557 administrations, the second quarter 622 and now the third quarter with 544. The same quarter last year reported 548 administrations.

This quarter is a five year low of administrations with a high of 2,018 in the fourth quarter of 2008.

Company Voluntary Arrangements were also down 3.8% in Q3 2013 (152) compared to Q3 2012 (161). Meanwhile receiverships saw the largest decline of 8.7% to 253 compared to 277 for the same period a year ago.

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