CORPORATE INSOLVENCIES rose a fraction, personal insolvencies fell a bit, cue press headlines and conjecture – so what do typically small quarter-on-quarter changes actually tell us?
Insolvency is not an up to the minute game. Liquidation could follow a year and a half behind the administration of the same company, or the statistic could relate to a dormant subsidiary. The impact of reduced discretionary spend for consumers could take a while to hit wholesalers further down the chain.
R3’s latest Business Distress Index from March showed a doubling of the number of firms that regularly using their maximum overdraft facility from 17% to 30%. This shows just how many businesses are really struggling out there, but are not part of the insolvency service statistics. The statistics do tell us however that we have not had the spike in corporate insolvencies that tend to follow a recession, as asset values rise and creditors act on failing businesses. We are living in a different world to previous recessions when creditors were much more ‘trigger happy’.
The statistics tell us that the liquidation rate never rose above 1% during the last recession, compared to a peak of 2.6% in 1993 and today stands at approximately 1 in 138 active companies (or 0.7% of all active registered companies).
While overall the trend may not indicate mass corporate insolvencies today, there are some real problems in the retail sector. Here it’s important to consider the scale of the retail collapses – we are looking at a 50% survival rate of some pretty big firms with large numbers of employees. These failures make a massive dent in the retail space, and today’s 18% jump in administrations on the previous quarter will be larger firms.
So what does this mean? Are we going to bump along in the era of zombie businesses for a while? I fear so. I would expect there to be slight increases in corporate insolvency this year, but ironically if the recovery picks up – the increases could be larger as zombie business are finally laid to rest. In a recovery period we are likely to see more corporate failures from start-ups.
On the personal insolvency side – the overall trend (ignore the quarter on quarter) is a great deal more pronounced – a steep upward curve since 2004. In the twelve months ending Q4 2011, approximately 1 in 366 people (more than 0.25%) became insolvent and this is currently still elevated compared to the annual average of 1 in 1600 (0.1%) people have seen over the last 25 years. At the same time, bankruptcy levels have been dropping since 2009, but I suspect these individuals are just stuck in an informal Debt Management Plan (and let’s face it no-one knows the actual number) – zombie debtors if you like.
In conclusion – yes let’s take notice of the official stats – but take into account not just corporate insolvency numbers, but also the size of a business (i.e. turnover), employee numbers and timing. These statistics must be interpreted intelligently if they are to mean anything.
Lee Manning is Deloitte partner at Deloitte and recently took over the presidency of insolvency trade body R3
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