Insolvency risks remain

By Jonas Crosland, 01 September 2010

Corporate insolvencies have continued to fall in the UK this year, even though historically, the number of companies going bust usually accelerates well after the low point of an economic cycle has been passed, sometimes not peaking until three years later.

Insolvency practitioners surveyed at the start of this year predicted that closures would rise to 28,000 this year up from 22,800 in 2009. But company failures in the first five months fell from 10,835 a year earlier to 8,729, according to data specialist Experian. And the trend has continued through the summer, with business failures in July falling from 2,312 a year ago to 1,542.

So, is it different this time, or has the inevitable merely been postponed?

Accountants maintain that for a lot of small- and medium-sized enterprises (SMEs) the dreaded day of owning up to insolvency has not been avoided but merely postponed. A recent poll of 250 accountancy firms revealed that 60 per cent still expect to see a rise in small companies going bust.

Many are believed to be treading water at best, with some spending more than their working capital just to stay in business. And the effects of the recession are still regarded as a key influence, with one in three accountancy firms in the survey classifying UK business strength as weak or very weak.

Ric Traynor, executive chairman of insolvency specialist Begbies Traynor , adds that insolvency levels have been distorted by a relaxed regime at HM Customs & Revenue. Companies have been given greater flexibility on the timing of tax payments. And interest rates at record lows have also offered some comfort. Without these, many companies would not now be in business.

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