Out-Law News 3 min. read
06 Aug 2012, 3:02 pm
Richard Williams of Pinsent Masons, the law firm behind Out-Law.com, said that a 3.6% decrease in the number of insolvencies over those in the first three months of the year was a trend that was "unlikely to continue" over the rest of the year.
In England and Wales 5,425 companies experienced some kind of insolvency event between March and June, according to figures by the Insolvency Service.
"We are particularly seeing an increasing number of insolvencies in the retail arena," he said. "The wet summer and the skewing effect of the Jubilee and the Olympics are not helping companies to manage their cash flows. Companies are fighting to stay alive by continuously restructuring through devices such as debt for equity swaps, to ensure that they are in a position to stave off default and dodge the insolvency bullet."
The retail sector was the worst hit in the second quarter of this year according to figures issued last week by PwC, with 426 insolvencies compared to 386 during the same period last year.
The number of "zombie" companies, or businesses unable to pay any more than the interest on their debts rather than reduce the amount owed, was a particularly worrying trend, he added. New figures from insolvency body R3 indicate that 8% of UK companies are "running on empty" according to its president, Lee Manning, with others struggling to pay debts as they fall due or having to negotiate more lenient payment terms with suppliers.
"Zombie companies are multiplying at an alarming rate, and with over 146,000 companies falling into this bracket - particularly in the retail and construction sectors - it is likely that despite second quarter figures there is going to be a continuing up-trend in the number of material corporate insolvencies," Williams said. "Many of these companies have no future and stakeholders are facing up to being unable to recoup their losses now or, with another recession on the horizon, hope for better value in more prosperous years to come."
Meanwhile figures published last week by Accountant in Bankruptcy, Scotland's Insolvency Service, showed that the number of failing companies north of the border has increased by 22% in a year. 420 Scottish businesses went under in the first three months of 2012/13, compared to 343 in the first quarter of the previous year.
Insolvency law expert Joanne Gillies of Pinsent Masons said the market increase in compulsory liquidations shown by the figures indicated an "increasingly contentious" approach being taken by the creditors of failing companies. A compulsory liquidation is when the court issues a 'winding-up order' against a company following the petition of an "appropriate person" - usually a creditor, or the directors of the company.
"The increase - up by almost 40% on the same period last year - effectively means that contentious insolvencies are on the rise and we'll see more disputes played out in the courts," Gillies said. "Patience seems to be running out for those businesses who have been given time to trade their way out of trouble - either by financiers or other parties such as HM Revenue and Customs (HMRC) - and research which we carried out in the past 12 months has demonstrated that HMRC in particular is becoming more aggressive."
The findings by Pinsent Masons showed that the number of petitions for bankruptcy filed by HMRC have almost doubled over a three-year period, Gillies said, while the number of winding-up orders issued by HMRC against businesses in Scotland has jumped by 75% in the same period.
"That is in direct contrast to England and Wales where numbers are headed in the opposite direction," she said.
The Insolvency Service's own figures showed a total of 4,115 compulsory liquidations and creditors' voluntary liquidations (CVLs), where the shareholders decide to put an insolvent company into liquidation, in the second quarter of 2012. This was a decrease of 3.6% on the number of insolvencies in the first three months of this year and 2.4% less than over the same period last year.
The figures also showed a fall in personal insolvencies, with bankruptcy orders at their lowest since 2003, which the Insolvency Service said was partly due to the introduction of debt relief orders (DROs) in 2003. A DRO is an alternative to bankruptcy which can be issued to those with minimal debts who do not own property. It can be amended or cancelled if the debtor's financial situation improves.
