Insolvencies drop, but the pain isn't over

The number of companies going out of business fell in the three months to September - but that doesn't mean it's going to carry on like this.

by Emma Haslett
Last Updated: 24 Jan 2011
Some good news to cheer up a dreary Friday - the number of businesses going into administration in the UK has fallen by almost a fifth from July to September, compared to the previous three months. The figure is a drop of almost a third on the same period last year, and the sixth quarter in a row that company insolvencies have fallen. Personal insolvencies have also fallen, to their lowest level in five years (way before the beginning of the recession). But that doesn’t mean we’re firmly on the road to recovery – the impact of those cuts has yet to kick in, and once they do, things might not be quite so rosy.

Don’t be fooled by the stats, though: there’s a difference between administration, which is usually used by larger companies when they run into trouble, and liquidation, which is more common among smaller companies (and a lot more final). So while administrations dropped to just 633, 3,974 companies went into liquidation – 2% below the pervious quarter, and 14% down on the same time last year. Although Malcolm Shierson, a partner in Grant Thornton’s Reovery and Reorganisation arm, says administrations are ‘the most suitable insolvency indicator to gauge the health of the economy’. So there you go.

Personal bankruptcies have also dropped, with a mere 13,907 people going bust in the last three months – that’s 3.7% down on the same quarter last year. Although that figure is skewed slightly by Debt Recovery Orders, a new system introduced in April, which are cheaper versions of bankruptcies – and have gone up for the seventh quarter in a row. That said, since you can only opt for a DRO if you have debts of less than £15,000, the figures at least show that the number of people with truly heft debts has decreased – which is encouraging.

Still, as with all these situations, the story is by no means black and white. While businesses (and consumers) have managed to claw their way out of debt over the last few months, the impact of the Government’s spending cuts are yet to be felt, which means the number of businesses declared insolvent is likely to rise as public sector suppliers feel the pinch. And for many creditors, it’s better to try to keep a company alive and squeeze as much as you can out of it, than let it slip into insolvency. As Brian Johnson, an insolvency partner at HW Fisher & Company told The Guardian, ‘The small- to medium-sized company sector is full of walking dead companies that will inevitably fail but which are being kept alive [by] creditors’. And while Halloween may be over, the time is ripe for a cull of the walking dead.

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