Partner Article

Falling corporate insolvency stats only half the story

Steve Ross, chair of insolvency trade body R3 in the North East and a partner in the Restructuring department of RMS Tenon, looks at why falling corporate insolvency statistics are only telling half the story.

One of the trends that has followed from the UK economy gradually clawing its way out of the double dip recession has been a continuing fall in the number of cases of corporate insolvency.

The quarterly figures released by The Insolvency Service have revealed a gradual fall in the numbers of liquidated companies since the most recent peak in 2009.

The Insolvency Service’s most recent numbers shows that UK company liquidations in the first quarter of 2013 had fallen 5.3% from the previous quarter and 15.8% year on year, and that administrations are also down 28.5% year on year.

The picture is much the same in the north east in terms of the downward trend, and there’s also a suggestion of increasing corporate optimism in R3’s latest Business Distress Index (BDI), which reports regularly on the successes and difficulties of hundreds of UK firms.

The latest BDI showed that the proportion of firms in the north east, Yorkshire and Humberside reporting decreased profits had fallen by just over half in the last year (24% versus 49% in spring 2012), and that only eight per cent of these firms said they’d lost market share so far this year, compared to 27% at this point in 2012.

It also showed that that percentage of firms that had invested in new equipment (26%), grown market share (23%) or seen sales volumes grow (25%) during that period was ahead of last year’s numbers for these categories (14%, 14% and 15% respectively).

Positive news indeed, but decreasing numbers of businesses ‘in distress’ does not, sadly, automatically lead to economic growth, and when you examine the north east situation a little more closely, you see that the picture is not quite as black and white as it might at first appear.

Many of R3’s members across the north east are reporting an increase in the use of Company Voluntary Arrangements (CVAs), which is, as the name suggests, a voluntary procedure set up between a firm and its creditors and shareholders which allows it to try to trade its way out of trouble with the support of a qualified Insolvency Practitioner. Setting up a CVA provides breathing space for companies that might otherwise go under, and gives the management team a chance to turn things round and save the jobs that the company supports, which is crucial for the regional economy.

It also indicates that creditors, a high proportion of which will be banks, are now more willing to provide this latitude, and aren’t calling their debts in as they might have done a few years ago.

This isn’t necessarily for altruistic reasons, especially as the persistently low values in the commercial property market means that any property-based assets aren’t currently likely to realise as much as the bank might like to see, but it does show that there are workable models out there for keeping an essentially sound company in business and for allowing it to trade its way back to a healthier position.

There remains a persistently high number of firms in the region that are surviving, rather than thriving, and looking forward to what is certain to be a challenging second half of the year.

The twin impact of rising fuel and utilities costs and squeezed consumer spending are likely to push many of them extremely hard, but there is at least greater encouragement than at any time in the last few years that solutions can be found to enable them to continuing trading towards, hopefully, a brighter future

This was posted in Bdaily's Members' News section by Steve Ross .