Following the release of official statistics from The Insolvency Service for Q4 2013 last week, Insolvency News presents the key figures and opinion from leading industry figures.
“Q4s statistics show that both company and personal insolvencies are down in 2013. In the final quarter of 2013 there were 7% fewer company liquidations and 4.6% fewer personal insolvencies.
“No one wants to see people and business getting into trouble and we are working to improve the insolvency regime to make sure it supports people and business in trouble while protecting creditors.”
“With the insolvency rate continuing to fall, businesses are showing real signs of confidence. As we have seen with the recent GDP figures and this quarter’s Business Confidence Monitor (BCM), the economy recovery is gaining momentum.
“However, the recovery needs to be sustainable in order for businesses to have a climate in which they can keep surviving and thriving. The economic recovery should not become reliant on debt, and needs to be balanced across all sectors and areas of the country. That’s why, when it comes to the Bank of England’s forward guidance, the Governor needs to look at broader measures such as capacity or investment growth – not just employment.”
“The latest figures from the Insolvency Service show a welcome decline in corporate insolvencies in the last quarter (Q4 2013).
“However, the numbers don’t really paint a true picture of UK corporate health. Recent research from the Bank of England suggests that 14% of banks’ lending to SMEs is subject to some kind of forbearance – whether in the form of loan term extensions, payment holidays, or transfers to interest only deals, so there is clearly a significant degree of distress still being felt by some businesses, despite the recent upturn in the economy.”
“The sharp quarterly upturn in administrations at the end of 2013, mirroring last spring, provides evidence that the general economy is recovering. Companies have been addressing their stressed balance sheets by using administration as a restructuring procedure to reposition their business model to benefit from the recovering economy.
“Most companies that have failed to invest in capital expenditure during the recessionary years will struggle to compete as the economy revives. A rise in administrations after a recessionary period normally points to a recovery being underway. A cull in zombie businesses is underway.”
“A pre-Christmas fall in insolvencies is typical, so the 0.6% year-on-year decrease in business failures for Q4 2013 does not come as a surprise. However, a low level of corporate insolvencies does not mean that UK businesses are now out of the woods. It is too early to say whether the historical correlation between economic recovery and a rise in corporate insolvencies has been broken – next quarter’s figures are the ones to watch and should allow us to draw firmer conclusions.
“Over the past few months we have seen greater appetite for investment from alternative sources of funding, such as private equity and pension funds, which are increasingly seeing competitive investment opportunities in UK businesses. However, companies need to guard against overstretching their resources to ensure sustainable long-term growth.”
“Corporate insolvency entered a quieter phase in 2013, with company liquidations down 7.3% for the year, and down by 16% for other procedures, mainly administrations.
“We are in a vastly different position today compared to 12 months ago, especially in the retail sector. The high street has undergone a re-balancing, but there will be different challenges for the year ahead. Businesses with greater working capital requirements could hit difficulties as they try to fund growth.”
“Insolvencies have shown a fall of 6.8% in the last quarter of 2013 and this is as expected as the economy continues to pick up. However, there are some interesting factors to take into account.
“The quarter’s low level of insolvency has been driven by the availability of investment funds to help bring companies back from the brink of collapse. Hedge funds and distressed venture capital funds are the busiest part of the restructuring community.
“The insolvency levels in the UK compare very favourably to other Eurozone economies, notably Spain and Italy, where the insolvency trend is still rising.
“I expect the decrease in UK insolvencies to continue during 2014. However, companies should not be complacent: management of cash is a key factor as the economy achieves its own turnaround.”
“The sharp drop in compulsory liquidations is a double-edged sword.
“The banks and other creditors have accepted that compulsory liquidation can be a cumbersome and costly process that rarely achieves a material return. Instead, they are playing the long game and letting the zombies operate for as long as possible in order to get what money back they can. But not calling in their debts is tying up the banks’ liquidity and so is depriving other companies of the capital they need to grow.
“It’s not the zombies that are rotting but the companies of tomorrow through under-capitalisation.”
“The fall in new personal insolvency cases, for the first time in six months, is welcome.
“However, we are concerned that the official statistics are the tip of the iceberg. The government monitors only new bankruptcies, Debt Relief Orders (DROs), and Individual Voluntary Arrangements (IVAs), but does not record new Debt Management Plans.
“The significant barriers to entry to IVAs, DROs, and bankruptcy can often mean insolvent individuals have no choice but to enter a DMP, take out a payday loan, or don’t address their debts at all. Some DMPs see people stuck in debt for years at a time, with their repayments barely making a dent in what they owe.
“Until the government begins to monitor new DMPs, the true scale of personal insolvency in England & Wales will be hidden. Changes to bankruptcy, DROs, and IVAs are also needed to ensure they remain accessible to those that need them.
“Although there were fewer new personal insolvency cases in 2013 than 2012, it is difficult to read too much into this. The insolvency profession simply hasn’t seen anything like the fallout from the last recession; the statistics have been all over the place and have not reflected the levels of personal debt our members are witnessing first-hand.
“It will be interesting to see how these figures change in the first quarter of 2014. Many people will have done their best to avoid insolvency in the run-up to Christmas, so there will be fallout from that in January and February.
“2013 was the eighth year running with over 100,000 new personal insolvency cases. Although numbers of new cases have fallen since 2009, personal insolvency levels are still astronomically high compared to recent decades.
“The medium and long-term outlook is mixed. Consumer debt has started to climb again, while the expected rise in interest rates will very likely have a knock-on effect on insolvency numbers.
“Although down this quarter, the emergence of IVAs as the most common insolvency route is symptomatic of people struggling with the rising cost of living. Bankruptcies are often triggered by ‘Big Bang’ financial events like job losses, but IVAs are more likely to be the result of a slow build-up of debt.”
“With the lowest number of personal insolvencies for eight years, the good news is that we’re back to pre-crash levels and we expect this to signal some stability going forward. However, our own figures indicate that there continues to be a significant north-south divide with London registering only 15 personal insolvencies per 10,000 people, while the North East is double that figure at 30.
“There’s also a danger that low interest rates and increasing consumer confidence may tempt some to borrow more than they can afford to repay, so we might not be quite out of the woods yet.”
“While it might appear that reducing insolvencies is cause for cheer, it is not the full picture.
“Personal insolvency figures exclude a massive swathe of people in Debt Management Plans – far more than bankruptcy numbers – many of which go on to fail. Also excluded are people simply servicing interest payments and barely keeping their heads above water who are vulnerable to any small fluctuation in cost of living or unexpected expense. As with corporate failures which are also reducing, an interest rate rise would tip many over the edge.”
“Whilst we can perhaps take some comfort from the overall declining trend, there is no doubt that there are many individuals struggling with unmanageable debt burdens. We are certainly not out of the woods and as a nation we should be very wary of encouraging reckless consumer borrowing to prop up our ailing high streets. Things will remain tough for a long time yet.”
“We know that massive and highly targeted marketing campaigns are attracting more and more individuals into using Debt Management Plans and Pay Day loans as ways to manage their debts.
“In many cases the arrangements are rolled over from one month to the next, and because of the punitive interest or high, front-loaded fees, very little capital is repaid and the individual’s financial difficulties get worse, not better.
“However, because these companies are not required to register their schemes, it is difficult to know exactly how big the scale of the problem really is. I am concerned that many people using Debt Management Plans and Pay Day loans will at best eventually end up formally insolvent or at worst taking desperate measures to repay their creditors.”
“Debt Relief Orders (DRO’s) – introduced in 2009 – and Debt Management Plans (DMP’s) continue to eat away at the bankruptcy numbers, although we may have seen a peak in DRO’s in 2012. Much debt forgiveness using this process may already have occurred in 2010-12 and we will probably now see the DRO numbers follow a downward trend also. Interestingly DRO’s continued to be a more popular method of discharging indebtedness with the female population in 2013, in line with previous years.
“Individual Voluntary Arrangements (IVA’s) numbers in 2013 are expected to remain at a steady rate per annum of about 45-48,000 and that market seems to have settled down, with improving approval rates and decreasing failure rates year on year, as tighter protocols and controls take effect.”
“Q4’s figures show that 2013 saw the lowest level of total personal insolvencies since 2005 and total corporate insolvency last year was at six-year low. This is clearly fantastic news and shows that the many avenues of practical debt help and support in the UK are working and we have a really successful rescue culture.
“However, looking beneath today’s figures, we can see it’s still a real mixed bag out there. One minute we are being told that the economy is growing at its fastest rate since 2007 and that construction of new homes is at its highest level for five years. However, the next minute, the Office for National Statistics (ONS) is saying that real wages have been dropping consistently by around 2.2% since 2010, the longest period of falls in 50 years.
“For me, the acid test for personal insolvency will be when the Bank of England starts to raise interest rates and people’s mortgage payments follow suit.”