The latest figures show a significant increase in insolvencies in the last year, with one in 138 active companies being liquidated during 2011. However, if you look behind the statistics, says Stephen Wainwright, Partner at Poppleton and Appleby, the picture might not be as bleak as it seems.
According to statistics released by the Insolvency Service, company insolvencies rose by 7.4% during Q4 last year in England and Wales compared to the same period in 2010.
In total, 4,260 businesses succumbed to compulsory or creditors’ voluntary liquidations (CVLs), with compulsory liquidations recording the biggest increase – up 14.1% on Q3 and 16.1% on the same period the year before. In comparison, CVLs were down 5.1% on Q3, but this was still 3.4% up on the same period in 2010.
‘Other’ corporate insolvencies – i.e. receiverships, administrations and company voluntary arrangements – also registered a 5.3% increase on 2010 levels.
Despite this downward trend, the liquidation rate (approximately 0.075%) still compared favourably to the peak of 2.6% in 1993 and the 25-year average of 1.2%. So, although the number of compulsory liquidations and CVLs is the highest since the final quarter of 2009, it is still modest in historical terms.
But what do all these statistics really mean for businesses?
“The relatively low liquidation rate does not accurately reflect the pain being felt by the corporate sector at the moment,” says Stephen Wainwright. “Looking behind the numbers, we’re seeing businesses stagnating or in slow terminal decline that are just about able to hang on thanks to low interest rates and forbearing bank managers reticent to pull the plug.
“This is certainly the calm before the storm and, in fact, if the economy is to recover, we must see some businesses fail, to allow viable ones to thrive.
“Looking at each quarter individually gives a rather skewed picture. In reality, the year on year figures show a decline in administrations, the same number of CVAs and a marginal increase in liquidations.”
However, businesses should not breathe a sigh of relief just yet.
“The total number of winding up petitions advertised in January 2012 was significantly lower than those advertised in January 2011, so there is not likely to be any increase in insolvencies in the short term,” says Stephen.
“But the increase in Interest Rates and, therefore, pressure on creditors makes it highly probable that there will be a large increase in corporate insolvencies in the second half of this year, or even sooner if banks are put under pressure following the on going problems in the Euro zone.”