Should insolvency figures reflect the position of a single company or a group of companies? Fred Satow says a better system can be devised. Jeremy Willmont says we should stick to the current system.
Report a single failure as a failure, by Fred Satow
The argument against the status quo for reporting insolvency statistics, where-by each company entering an insolvency procedure is reported as a failure, is that it is misleading.
Indeed as equally misleading as the opposite approach, reporting the failure of a group of companies/entities as a single failure.
It is misleading because it provides an exaggerated view, in economic terms, of the number of ‘live’ trading companies which fail.
People may read the statistics without knowledge of the manner in which they are prepared and the various issues underlying their preparation and assume that each failure represents a ‘live’ trading company failing.
This may not actually be the case, because dormant companies within larger groups, which may enter an insolvency proceedings, for completeness sake, will also be recorded as a failure. This also allows lenders or other creditors to be confident that all companies within a group are under the control of an insolvency office holder.
Of course the opposite approach may understate the number of ‘true’ trading companies which fail for similar reasons.
Indeed given the importance some clearing banks and other interested parties attach to these statistics it is somewhat surprising that this issue has not been resolved previously.
One possible solution would be to report, in the statistics, the failure only of operating companies, which could be defined as companies / entities trading at the date of insolvency (if necessary this could be defined by reference to dormant company accounts filed at Companies House).
Another solution would be to continue to report all companies/entities failing as presently, but also to provide data on dormant companies/entities within these failures and/or operating companies/ entities.
Given the level of innovation and problem-solving skills in this industry, will we still be discussing this in ten years’ time?
Of the two views, if we cannot resolve this issue and improve the position as suggested above, I would argue that it provides, generally, a more accurate picture if we report as single failure each individual company which fails, even if it may overstate the position.
Skewed statistics aren’t all bad. says Jerem Willmont
The administration of 133 companies in the Federal-Mogul UK Group will have a noticeable effect on the next quarterly insolvency statistics published by the DTI. To put this into context, the number of administrations in the first nine months of 2001 was only a little over 400.
As Accountancy Age has pointed out, the figures will therefore be completely skewed. But being skewed isn’t necessarily bad and doesn’t mean that we need to change the basis on which the figures are produced.
The insolvency statistics show the number of individual companies that have become subject to some form of insolvency procedure. This reflects the fact that each company is a separate legal entity, subject to separate insolvency proceedings and with its own creditors, shareholders and board of directors. It has been suggested it would be better to count the administration of a group of companies as just one insolvency, rather than multiple insolvencies.
However, there are problems with this approach.
A major issue would be determining when a group becomes insolvent. Is it when every member of the group is subject to insolvency proceedings or just some of them?
If administration orders are made in respect of 50% of the companies in a group is this counted as half an administration? What happens if all of the companies in a group are placed in receivership apart from a couple of dormant subsidiaries? Or, as part of a group reorganisation, dozens of companies are placed into liquidation but the largest trading company is allowed to continue?
Of course, rules can be devised to deal with problems like these. But applying such rules is bound to make the figures more complicated to produce (and easier to manipulate) and will probably result in some anomalies with the figures occasionally looking a bit odd. For users to draw meaningful conclusions, they will need detailed notes explaining how the rules work and identifying any exceptional items. Surely it is much easier to stick to the current system where one administration means, unambiguously, one administration.
We all know that, on the rare occasions a very large number of companies in the same group go into administration, there will be enough media coverage for everyone who is interested to know why the figures are skewed.