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Fall in corporate insolvencies “a sign of stagnation rather than recovery” say experts

The number of corporate insolvencies fell again in the third quarter of this year, according to official statistics. However, experts have warned that the drop is a "worrying sign of stagnation" rather than an indication of a recovering economy.06 Nov 2012

Commenting on the latest quarterly figures from the Insolvency Service, restructuring law expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said that many UK-based businesses remained "in need of restructuring" five years after the initial 'credit crunch' in 2008. However, low growth economic conditions and the "sheer scale" of legacy corporate debt make many formal insolvency procedures unattractive, he said.

"Formal insolvency procedures are designed to rescue what can be saved and to close what is no longer viable," Lomax said. "As a result of prevailing economic conditions many of these 'zombie' businesses simply survive - at least until something comes along which will upset this damaging equilibrium."

'Zombie' companies are businesses unable to pay any more than the interest on their debts rather than reduce the amount owed. Insolvency trade body R3 warned in September that as many as 18% of retail businesses were in this position, with quarterly rent payments proving of particular difficulty. Commenting on the latest figures, R3 president Lee Manning said that 146,000 businesses were currently classed as 'zombies'.

"While this decrease in corporate insolvencies is to be welcomed, there are many other businesses stagnating," he said. "Some of these businesses have been 'running on empty' for quite some time now, and with no reserves left in the tank, they may not be able to carry on for much longer."

According to the figures, 3,971 companies in England and Wales were liquidated between July and September. The figures show a decrease of 2.8% on the previous quarter and a drop by 6.6% in the number of similar procedures over the same period last year. There were an additional 986 corporate insolvency events, including administrations and company voluntary arrangements (CVAs), in the same period, a decrease of 21% on the same period a year ago.

Richard Williams, an insolvency law expert with Pinsent Masons, said that although the sharpest drop shown by the figures was in the number of administrations "no-one should assume that the trend will continue downwards". Administration is the most common route by which a larger business enters the insolvency process. Administrators, once appointed, take control of the insolvent company's assets in order to extract the best possible value for the benefit of the creditors.

"The current lull is largely down to a combination of low interest rates and the current approach of lenders, which is to prefer to manage their distressed portfolios rather than to enforce and make provisions," Williams said. "The future remains bleak for the many thousands of 'zombie' entities that are currently being kept afloat by their lenders on the basis of 'Hobson's choice'."

Struggling electronics retailer Comet appointed administrators on Friday. The company, which employs approximately 6,500 staff across its 243 UK stores, is the latest High Street name to file for administration this year following similar announcement by retailers including GAME, Clinton Cards, Peacocks and JJB Sports.

The Insolvency Service also indicated a slight increase in the number of individuals becoming insolvent since earlier this year, although the figures showed a 7.2% improvement from the same period in 2011. According to the figures, more individuals are now using simpler debt relief orders (DROs) than traditional bankruptcy procedures. 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.

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