Debt Advisor: “Insolvencies could be five times higher”

Figures published today by the Insolvency Service show that company liquidations in England and Wales in the third quarter of this year were down 2.8% on the previous quarter and down 6.6% on the same quarter in 2011. Personal insolvencies dropped in the third quarter 2012 to 28,062 and were 7.2% less than the same period 12 months ago.

Bev Budsworth, managing director of multi award-winning The Debt Advisor said: “It’s good to see that today’s corporate insolvency figures are down but they really don’t tell the whole story – we know from previous experience that for every one of today’s statistics, there are bound to be at least four or even five companies with no assets or cash to fund the liquidation process who will simply be struck off for failure to file their accounts.”

Wading through treacle

“These companies are effectively ‘wading through treacle’ at the moment – faced with so many urgent issues, they are completely paralysed to respond. Given enough time and inaction, these so-called ‘Zombie companies’, maybe as many as 20,000 a year, will eventually go to the wall in effective silence, unable to afford the liquidation process.

“I believe that today’s figures mask the true problem and the reality is that level of corporate insolvency could be up to five times higher.”

Bev’s comments come at a time of intense pressure on companies who are trying to keep themselves solvent. Although recent GDP figures painted a more optimistic future for the country, the level of output in the third quarter of this year was almost exactly the same as it had been in the third quarter of 2011, therefore, remaining relatively flat.

“We continue to see proof that it’s the smaller businesses that are failing,” added Budsworth. “According to Experian, over 44% of corporate insolvencies in September were smaller businesses – between one and ten employees. In our experience, while the sluggish economy is certainly not helping, there are other ‘human’ factors including shareholder or director disputes, poor management or just naivety that have ultimately led to their downfall.”

Nightmare on the High Street

Bev continued: “It continues to be tough for High Street retailers despite a recent rise in retail sales. Sales in September were up around 2.5% on the same month in 2011 and 0.6% up on August 2012 figures, with the Olympics cited as a reason people put off clothing purchases.”

“The real problem we are seeing now is the type of retailers going under. We are seeing more and more insolvencies in larger retailers, those with multiple outlets, affecting many staff.

“Yesterday’s announcement that electrical retail giant Comet will be placed into administration next week reminds us that regardless of whether we are out of a recession, we are certainly not out of the woods yet with this being the biggest casualty of the High Street since Woolworths in 2008. Up to 6,500 jobs and 240 stores are now at risk at the retailer that has been established for nearly 90 years.

“Earlier in the week, Home Retail Group also announced plans to shut or relocate 75 of its Argos stores in the next five years, with 10 stores due to close before the end of the year.”

Bev’s comments are echoed in a recent retail report from PwC and Local Data Company. The report found that as many as 20 stores a day closed throughout the first half of the year. This figure rose to 32 closures per day throughout July and August.

Over expansion was blamed for the closures, with toy shops, clothes shops, jewellers and furniture stores making up the bulk of those shutting their doors and coffee shops, discount stores, bookmakers and charity shops bucking the trend.

The big squeeze

“Today’s figures for personal insolvency were down – which is good news and also good to see that more people had opted for an Individual Voluntary Arrangements (IVA). However, our whole economy remains extremely fragile with insolvency in general showing no dramatic reduction,” said Budsworth.

“We are now officially out of a recession and unemployment continues to decline. However, the big squeeze on people’s finances continues. Only this week, KPMG reported that one in five people, that’s nearly five million people across the UK, failed to earn the living wage – a wage that enabled a basic standard of living.

“This is a real problem; with energy prices on the rise again, fuel poverty will again hit the headlines this winter as many more people struggle to pay their bills. Add to this the fact that more and more companies are downsizing to improve the bottom line, it could really shape up to be a bleak winter for many.”

Today’s personal insolvency figures cover formal insolvency plans such as IVAs, bankruptcies and Debt Relief Orders (DROs).

Bev continued: “The figures don’t tell the real story. For every 9,000 people that choose a formal insolvency plan each month, around 15,000 opt for an informal debt management plan.”

Debt management plans are often preferred as a ‘softer’ option to the IVA and while they can be in the short term, for longer term debt, interest may continue to accrue and creditors are not stopped from taking action.

“Worse still, we are seeing more and more people coming to us after taking out payday loans which they can no longer afford. These types of loans are easy to obtain but notoriously difficult to pay off with APRs often over 4,000%.

“Resorting to pay day loans when you are already in debt just adds to the misery. These loan companies are not the most patient if you cannot pay back the loan – and the added pressure can often seriously affect your wellbeing.”

Bev concluded: “If you are unable to afford your commitments, there are a number of formal and informal plans that enable you to work with your creditors and repay your debts at a level you can afford.”

The figures from the Insolvency Service consisted of 12,668 Individual Voluntary Arrangements, a decrease of 2.9% on the corresponding quarter in 2011, 7,617 bankruptcies, representing a decrease of 20.5% on the corresponding quarter of 2011 and 7,777 Debt Relief Orders, up 2.3% on the corresponding quarter in 2011.

Submitted by Good Relations North