• Andrew Tate, President of insolvency and restructuring trade body at R3


• 27.01.2017 10:45 am
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Corporate insolvencies

The corporate insolvency numbers have been skewed by a wave of personal service companies being closed in the last quarter. It may have been just the closure of a handful of companies run by an umbrella provider which led to the spike. When you look beyond that though, 2016 had more or less the same number of insolvencies as last year.

Despite a number of challenges for businesses in 2016 – the fall in the value of the pound since June’s EU referendum and the introduction of the National Living Wage among them – there is still a lot of downward pressure on corporate insolvency numbers to balance these out.

Businesses are enjoying a significant safety net: compared to the pre-financial crisis economy, creditors – particularly banks – are much more patient with their borrowers, businesses are benefiting from record low borrowing costs, and an increased focus by the insolvency and restructuring profession on early intervention has helped businesses avoid formal insolvency procedures.

Businesses are in a position where they can sit on cash or take on new borrowing. R3’s regular surveys of business distress have found that key signs of business distress are near their record lows, and that almost one-in-ten (8%) businesses are paying off only the interest on their debts.

The fall in the value of the pound since the summer will undoubtedly have been a shock to some smaller businesses though – almost half our members have said Brexit has come up in discussion with struggling businesses since June.

After half a decade of falling insolvencies, insolvency levels are lower now than they were even before the financial crisis. However, the decline now seems to have stalled and we’ve had a very small increase instead – that’s the first increase in insolvencies since 2011.

2017 will be an important test: many larger firms will have been protected from the pound’s fall by currency hedges or long-term fixed-price contracts, but these will unwind or end this year. Businesses have been buoyed by resilient consumer spending since the EU referendum but much of this is on the back of increased borrowing – it’s not clear how sustainable this will be. Firms in the South East and London will also have to adjust to new, higher business rates from April.

Personal insolvencies

Increasing access to statutory personal insolvency procedures has been the story behind 2016’s rising personal insolvency numbers. It’s not necessarily that more people have needed a personal insolvency procedure, but that more people are able to enter a debt solution appropriate to their situation.

There are still some significant downward pressures on personal insolvency numbers though, which have helped reduce insolvencies since the last quarter.

Despite a recent acceleration in consumer borrowing, personal finances are not too bad at the moment. R3’s last survey of British adults’ personal finances found that 38% of British adults were at least fairly worried about their current level of debt – a proportion that has fallen steadily from the 46% in the same position in March 2015. And while businesses have some pressing Brexit concerns, any financial impact of the EU referendum result, such as higher inflation, will take a little while to filter through to wallets and purses.

Compared to last year, however, insolvency numbers are much higher. This is mostly thanks to changes in the way insolvency procedures work.

Access to Debt Relief Orders (DROs) was widened at the end of 2015 – as campaigned for by R3 – allowing more people on low incomes and with few assets to deal with small, but problem debts. DRO numbers have been correspondingly higher throughout 2016 as a result.

Similarly, bankruptcy applications moved online in April 2016, improving accessibility, slightly reducing the application cost, and removing some of the stigma involved in the bankruptcy process. The fall in bankruptcy numbers is lower than it has been recently.

IVAs leapt during 2016, but with real wage growth continuing and inflation still historically low, albeit rising, it is more likely the increase is down to changes in the debt management plan market than wider economic factors. Non-statutory debt management plans have come under increased scrutiny from the FCA and elsewhere, which has seen those in long-term versions of these plans switching to more appropriate statutory debt solutions, typically IVAs. IVAs must be overseen by a licensed insolvency practitioner.

It’s important to remember that the government’s personal insolvency statistics do not include the thousands of people who are still in non-statutory debt management plans. These are now regulated by the FCA, but no numbers are published which would help us understand their usage.

And while a debt management plan may be suitable for some users, others may be better suited to a formal insolvency procedure that they cannot access. To enter bankruptcy, for example, costs £680 in up-front government fees. Making these fees payable by instalments over the course of a bankruptcy would help those who need to access a formal insolvency procedure more suited to their situation.