There May Be More insolvent Companies Than are Visible in Government Statistics

Copyright (c) 2010 Alison Withers

As the consequences of the global financial crisis that began in the autumn of 2008 continue, it is reasonable to assume that the numbers of companies in financial difficulties serious enough to precipitate insolvency would be increasing.

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 last year.

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 would be tempting to infer from these figures that the economy is beginning to recover and the pressure on companies is easing.

It is being suggested, however, that the decline in liquidations is concealing the number of companies in financial difficulties because of a lack of pressure from creditors other than the HMRC (Her Majesty's Revenue & Customs ), the only active creditor currently seeking winding up orders in the courts.

The outcome of the government's Comprehensive Spending Review in October 2010 may reveal the full impact on UK insolvencies, say business rescue advisers, some of who suggest that even if the country avoides a double dip recession there is a risk that the UK could develop a twin-track economy in which public sector-dependent companies might face higher levels of financial distress than sectors less directly linked to the 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. However, the question 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.

It there fore makes sense for those companies just clinging on by their fingernails to call in a rescue adviser to carry out a thorough review of their business viability, pinpoint any weakenesses and offer a structerd plan to help them through the expected slow-down and avoid being catapulted into a crisis from which it may not be possible to recover.

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.


------

While Corporate insolvencies are still well below the numbers that would normally be expected at this point in the cycle, according to UK Government statistics, but it is possible that far more companies are in serious financial difficulties than the figures suggest. Writer Ali Withers investigates.