In These New Times

David Jetuah

Accountancy Age

7th August, 2009

Hostile economic conditions have seen more than 33,000 people file for bankruptcy in the last quarter alongside 5,055 company liquidations and 1,529 other collapses.

The Insolvency Service statistics released today reflected the unforgiving economic conditions individuals and businessesare struggling to ride out.

There were 33,073 individual insolvencies in England and Wales in the second quarter of 2009. This was an increase of 27.4% on the same period a year ago.

This included 18,870 bankruptcies, 15.3% up on Q2 2008, 12,225 individual voluntary arrangements, a 27.4% rise on the same period and 1,978 debt relief orders.

The debt relief orders were brought in on 6 April this year as an alternative to a traditional bankruptcy proceeding.

DROs provide debt relief for people living in England and Wales who do not own their own home, have little surplus income (no more than £50 a month), assets (other than possibly a car) not exceeding £300, and less than £15,000 of debt.

The personal insolvency climate has generated some serious concerns in the profession.

Mark Sands, director of personal insolvency at Tenon Recovery, said: ‘The overall record level of personal insolvencies, while at first shocking, hides the detail which suggests the worst is yet to come. Bankruptcies have fallen compared to the previous quarter – however, year-on-year bankruptcy figures are up and I believe this to be a temporary respite before the inexorable rise continues.

‘IVAs have become more popular as people seek to protect their family home. DROs are at nothing like the levels expected. These three factors mean that overall levels will continue to increase throughout 2009, with a record level of 140,000 or more personal insolvencies expected by the end of the year.

‘At first glance, DROs seemed to be a quick and easy solution to assist with Britain’s poorest debtors. So much so, I would have expected at least three times as many DROs in last quarter’s insolvency figures. However, eleventh hour changes to include a person’s pension in their assets seems to have narrowed the criteria to such an extent that DROs are now only applicable to a handful of people.’

Corporate breakdowns showed 5,055 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the second quarter of 2009 (on a seasonally adjusted basis). This was an increase of 2.9% on the previous quarter and an increase of 39.1% on the same period a year ago.

1,529 other companies collapsed in Q2 2009 (not seasonally adjusted) comprising 345 receiverships, 1,027 administrations and 157 company voluntary arrangements.

This was a 22.7% increase on the same period a year ago.

On the corporate side, the figures show a slight increase from the first quarter of 2009, which suggests collapses may have peaked but the IP community remains unconvinced.

Richard Fleming, UK head of restructuring at KPMG, said: ‘The second quarter figures are continuing to hold up. The predicted lull during the July holiday season just hasn’t materialised, as we’ve seen a swathe of insolvency appointments being made, across all sectors. We see this trend continuing well into August and probably for the second half of the year.

‘We’re seeing that lenders are acting with more certainty as they appear to be taking more decisive action on individual cases. They are beginning to crystallise their losses quicker, and move on from them in a bid to begin to balance their books.’

Andrew MacCallum, managing director at restructuring and turnaround firm Alvarez & Marsal, which is handling the restructuring of Lehman Brothers Holdings Inc, said: ‘We are merely at the end of the first wave of insolvencies in this recession. More than five thousand companies may have gone into administration in the last quarter, but we can expect to see that figure exceeded in every quarter until at least the end of 2010.

‘Companies that have survived the past year since the collapse of Lehman have done so by significantly cutting costs and shoring up their finances. However, many surviving businesses are exhausted managerially and financially, and now lack the resources to continue, just when we are beginning to see some early positive signs.’

Liz Bingham, UK head of restructuring at Ernst & Young, warned the rise in individual insolvencies and the continuing high level of corporate insolvencies was just ‘the tip of the iceberg’.

‘The figures do not include restructurings or debt management processes in use outside of formal procedures or those companies who are effectively dead in the water, but whose debt structures lack triggers to force intervention,’ Bingham said.

‘Moreover, it is unlikely that these figures represent the peak of UK insolvencies. The rate of economic contraction may have slowed in the second quarter, but in the last recession the insolvency peak lagged the economic trough by over a year.’

Further reading:

Deloitte predicts 33,000 personal insolvencies