Are Government Insolvency Statistics Concealing the Number of Insolvent Companies?

Copyright (c) 2010 Alison Withers

It would be reasonable to assume that the numbers of businesses in financial difficulties serious enough to precipitate insolvency would be increasing as the consequences of the global financial crisis that began in the autumn of 2008 continue.

However, figures for the second quarter of this year (April to June) released by the UK Insolvency Service in August 2010 show that there were 2,080 companies in England and Wales that were placed into liquidation.

These are made up of compulsory liquidations and creditors voluntary liquidations.

The figures showed a 0.5% increase on the previous quarter but a decrease of 19.1% on the same quarter in 2009.

Compulsory liquidations were down 9.9% on the previous quarter and 21.0% on the corresponding quarter in 2009, while creditor voluntary liquidations were up 5.4% compared with the previous quarter but down 18.3% compared to the same quarter in 2009.

Other corporate insolvencies in the same period (made up of receiverships, administrations and company voluntary arrangements) also showed a decrease, of 14.3% compared with the same quarter a year ago.

It is tempting to deduce from these figures that the economy is on the path to recovery and the pressure on companies is easing.

However, it is being suggested that the decline in liquidations is hiding the numbers of companies that are in financial difficulties because of a lack of pressure from creditors other than HMRC (Her Majesty’s Revenue and Customs) which is currently the only active creditor seeking winding up orders in the courts.

The Government’s Comprehensive Spending Review in October may reveal the full impact on UK insolvencies according to business rescue advisers, some of whom are suggesting that even if the UK avoids a double dip recession, there is a risk that the UK economy could develop a twin track economy, with public-sector-dependent industries facing higher levels of financial distress than sectors which are less directly linked to government spending cuts.

Some commentators argue that while Corporate insolvencies are still well below the numbers that would normally be expected at this point in the cycle and the slight quarterly rise in the number of liquidations may signal that conditions are starting to turn against UK companies once again. The question, however, is whether this is a normal cycle.

The lower than expected number of insolvencies is ascribed to a variety of proactive measures, HMRC Time to Pay arrangements and bank forbearance, which together have bought time for companies by allowing them to deal with their financial situation.

However, this may perhaps have only delayed the inevitable for others that are less robust or those that fail to use the time by taking remedial action to reduce costs or implement other steps that ensures survival. Industry surveys have been more down-beat in the third quarter, particularly in the parts of the service sector that may be vulnerable to the impact of public sector austerity and it is these sectors that are most likely to be under pressure.

For those companies just clinging on by their fingernails it therefore makes sense to call in a business rescue adviser to conduct a thorough review of the business viability, identify any weaknesses and provide a structured plan to help them through the predicted slow-down and avoid being precipitated into a crisis from which there may be no recovery.

Leaving it to the point where the situation becomes critical is leaving it too late. On the other hand, being proactive by planning and implementing remedial measures may just help with survival.