Insolvencies rise for the first time in 2011

Personal insolvencies in England and Wales rose 1% in the second quarter but are down 12% on last year, report the Insolvency Service.

There were 4,233 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the second quarter of 2011 (on a seasonally adjusted basis).

This was an increase of 2.7% on the previous quarter and an increase of 4.4% on the same period a year ago.

This was made up of 1,290 compulsory liquidations (which are up 19.8% on the previous quarter and up 11.1% on the corresponding quarter of the previous year), and 2,943 creditors’ voluntary liquidations (which are down 3.3% on the previous quarter but up 1.7% on the corresponding quarter of the previous year).

Additionally, there were 1,232 other corporate insolvencies in the second quarter of 2011 (not seasonally adjusted) comprising 350 receiverships, 695 administrations and 187 company voluntary arrangements. In total these represented a decrease of 6.0% on the same period a year ago.

INDIVIDUAL INSOLVENCIES

There were 30,513 individual insolvencies in England and Wales in the second quarter of 2011. This was a decrease of 12.2% on the same period a year ago.

This was made up of 11,113 bankruptcies (which were down 25.8% on the corresponding quarter of the previous year), 12,143 Individual Voluntary Arrangements (IVAs), (which were down 9.8% on the corresponding quarter of the previous year) and 7,257 Debt Relief Orders (DROs), (which were up 15.3% on the corresponding quarter of the previous year)

In the second quarter of 2011, 83.0% of bankruptcies were made on the petition of the debtor, broadly comparable to the levels for recent quarters.

The percentage of bankruptcy orders involving trading debts (self-employed bankruptcies) was 20.6% in the first quarter of 2011 (second quarter 2011 figures for trading-related bankruptcies are not yet available), noticeably higher than levels seen in recent quarters.

COMPANY LIQUIDATION AND INDIVIDUAL INSOLVENCY RATES: LONGER-TERM PERSPECTIVE

In the twelve months ending Q2 2011, approximately 1 in 139 active companies (or 0.7% of all active registered companies) went into liquidation, which is unchanged from the previous quarter.

The liquidation rate remains low compared to a peak of 2.6% in 1993, and the average of 1.3% seen over the last 25 years.

It should be noted that the number of active companies has changed considerably over this period; there were 2.3 million active registered companies in Q2 2011; this compares with only about 900,000 in the early 1990s and less than 800,000 in 1986.

In the twelve months ending Q2 2011, approximately 1 in 349 people became insolvent. This is down from 1 in 337 in the previous quarter.

The individual insolvency rate has displayed a steeply upward path (with some fluctuations) since 2004 and is currently elevated compared to the annual average of 1 in 1780 (0.1%) people seen over the last 25 years.

Frances Coulson, R3 President, said:

On Personal insolvency increases:

“The quarter on quarter increase in personal insolvency is regrettable, yet expected, given job cuts and compulsory redundancies being announced in recent months, in both the public and private sector.

“Nearly a third of people (30%) do not have any savings at the moment according to R3’s latest personal debt snapshot, with many households failing to have a contingency plan for any fall in income or increased outgoings.

“Therefore, a swift change in circumstance such as losing a job is likely to have pushed many individuals into insolvency.

“The increase in personal insolvencies is likely to continue; we have seen over recent months living costs rise and high inflation effectively reducing ‘take home’ pay. Added to the fuel hike that will hit families in the winter months, this may be the start of a worrying trend.

“Unfortunately, this data does not capture the figures for those in informal insolvency procedures such as debt management plans so we are unable to get a true measure of how many households are struggling.

“R3 research revealed more than 2 million people have taken out a ‘payday’ loan over the last year, while 53% of individuals are concerned about their current levels of debt.”

On Corporate insolvencies increase for consecutive quarters:

“The consecutive quarter increase in corporate insolvency levels is unsurprising given the latest GDP figures revealing marginal growth of just 0.2%. Despite the economy officially being out of recession for some time the early recovery is sluggish and confidence has not returned to UK plc.

“In recent months we have seen many high-profile retail businesses fall into administration, triggered by ‘Quarter Day’, the traditional time for commercial businesses to pay their next quarter’s rent.

“It revealed that for many retail businesses who hung on through the worst of the recession they simply did not have the funds to meet their rental obligations.

“This is reflective of many businesses in other sectors; they have depleted their reserves to stay afloat and have no contingency plan for additional costs, unexpected outgoings or a fall in sales.”

David Chubb, partner, business recovery services, PwC, commented:

“Although the overall corporate insolvency figures show a slight increase on the same quarter last year, in our view, many businesses are experiencing increasing difficulties in the current economic climate. This is not necessarily reflected in these statistics.

“It seems that there may be a lot of businesses closing down without the need for an insolvency process because they are making the conscious decision to cease trading before the business reaches the point of no return.

“On a positive note, there is a sense that banks and other stakeholders are supporting struggling businesses whenever they can to try and avoid insolvency at all costs, but given the economic outlook, this will be a continuing challenge.”

Andries Smit, founder, SMEDiscounts, comments:

“The Insolvency Service data clearly shows that businesses are suffering. The fact that almost 20% more businesses were in such a poor state that they were forced to liquidate is a worrying indictment of our economic state.

“The last time we saw company liquidations above the 16,000 per annum mark was in 2002, so although liquidations are flat quarter on quarter, this is still significantly higher than pre-recession days.

“Over a quarter of SMEs and sole traders responding to our survey describe their business as being in poor health, so it appears that the worst could be yet to come. Those who lack a great product or innovative approach are not going to be able to climb out of the rubble left behind by the economic implosion of recent years.

“It’s notable how many self-employed individuals are going bankrupt. There is an increase in consultants and contractors being laid off by big businesses and at the same time there are head count freezes in big corporations, leaving them nowhere to go.

“The key question to ask is, are the two-thirds of businesses that we surveyed that think the worst is still to come doing enough to weather the looming storm?”

Brian Johnson, an insolvency partner at HW Fisher & Company chartered accountants, said:

On company insolvencies:

“The sharp spike in compulsory liquidations reflects the more aggressive stance of the Revenue, which is now calling in its debts and forcing struggling companies into a formal insolvency process. This is the beginning of the end for the thousands of zombie companies out there.

“Although the number of company insolvencies has risen during the second quarter, we expect activity to really pick up speed during the second half of the year. And remember that these insolvency figures, bad enough in themselves, don’t include businesses that wind themselves up — and so don’t tell the full story.

“Last month, data from Companies House revealed that record numbers of firms are going out of business without formally filing for insolvency. This tells us that they have been so badly hit that there is no point even carrying out a salvage mission.

“Meanwhile, the banks continue to claim they’re doing their bit by lending to business. But despite their insistence that they’re open for business and the targets set them by Project Merlin, the fact is they will not lend to businesses that are not bankable.

“Looking at the wider economic picture, the prospects for growth in the short and medium term are very poor and the consumer is on the rack. This bodes ill for companies that are anything less than robust.

“What we are also seeing is that the pain is being spread unevenly. Scotland, Yorkshire and North East England have all fared far worse than the South East.”

On individual insolvencies:

“Creditors continue to avoid the nuclear option. They can spend money bankrupting people but then they won’t get their money back anyway. Once again, we are seeing debtors opt for cheaper, non-bankruptcy-type solutions such as Debt Relief Orders.

“For the time being they are biding their time but when asset values do finally rise, creditors will see an opportunity to get their money back and may well make their move.”

Dan Watkins, Director, Contact Law, comments:

“Enquiries into insolvency-related legal issues is now, by a distance, our fastest growing area and this is a trend that shows now sign of slowing down. Individuals and companies alike are paying a high price for the country’s economic woes, with the financial situation of many now spiralling out of control.

“For many people and businesses their position is clearly so weak that they feel they need to seek advice from a legal expert.”

Source: www.myintroducer.com