Commenting on the Q2 2017 England & Wales insolvency statistics (published this morning by the Insolvency Service), Adrian Hyde, president of insolvency and restructuring trade body R3, says:
Underlying Corporate Insolvencies Down
- Total company insolvencies increased by 12.6% from Q1 to Q2 2017 and are 27.8% higher than Q2 2016;
- However, April 2016 restrictions on what travel expenses self-employed people can claim for tax purposes led to the one off liquidation of 1,131 personal service companies (which had been set up for tax purposes).
- Without these companies corporate insolvencies fell 15.4% from Q1 to Q2 2017 and are 4% lower than this time last year.
“Once you strip out another one-off wave of liquidated personal service companies linked to tax changes, a recent run of quarterly increases in underlying insolvency numbers has been checked back sharply.
“The figures are pretty surprising given insolvency practitioners have been reporting a tougher time for businesses in 2017.
“The unexpected drop in inflation last month is one hint that things may have eased up for businesses since the end of 2016, and while the Bank of England has been warning about rising consumer debts, businesses will still be benefitting from debt-fuelled spending in the short-term at least.
“There are other factors to consider, which may explain the sharp underlying drop, including the introduction of new insolvency Rules in April. Some formal insolvency processes may be being delayed while creditors, debtors, and others get used to the new decision-making procedures.
“As ever, it’s important not to read too much into a sudden change in one quarter. Prior to this quarter, insolvencies had been rising more consistently than they have done since just after the financial crisis and there are still lots of warning signs for businesses out there. Higher inflation means higher input prices for businesses on the one hand and squeezed disposable incomes for consumers on the other. Added to this mix is wavering consumer confidence, while the election outcome and Brexit negotiations may cause uncertainty for businesses, too.
“On top of all this, businesses have had some significant increases in fixed costs over the last year. The pound’s travails have raised some import prices, while the 2016 introduction of the national living wage means the minimum wage is now £1 higher than it was in 2015. Some businesses have seen their business rates increase, while more and more businesses have had to comply with pension auto-enrolment. Although the economy is growing, it will need to grow fast enough to balance these factors out.
“If this recent decrease turns out to be a blip in an upward trend, it would be a warning sign for the wider UK economy, especially as businesses continue to enjoy some key advantages: interest rates remain at record lows, while creditor forbearance among traditional sources of business finance, like banks and trade creditors, is still much higher than it was before the financial crisis.
“Recent research by R3 found that nearly 80,000 UK businesses would be unable to repay their debts if interest rates were to rise by a small amount. Many firms have limited room for financial manoeuvre.”
Personal Insolvencies Down
- Personal insolvencies fell 9.7% from Q1 to Q2 2017 and are 0.1% lower than this time last year.
“The latest figures show personal insolvencies falling significantly, bucking an upward trend which started two years ago.
“Notably, the decrease has been driven by Individual Voluntary Arrangements – a type of procedure typically associated with consumer debts – which make up the bulk of the numbers of personal insolvencies.
“The fall appears somewhat counter-intuitive, given that personal finances are being squeezed with wages rising more slowly than inflation, household savings rates are tumbling, and consumer confidence is shaky, while the Bank of England has recently raised concerns about the sustainability of consumer borrowing.
“Cheap credit remains available and plenty of zero-percent introductory offers on credit cards are still around, which may be exerting downward pressure on the personal insolvency rate.
“The statutory personal insolvency numbers should be treated with a touch of caution, however, as they don’t tell us about the number of insolvent people repaying debts using non-statutory options, such as debt management plans. Access to statutory debt solutions can be just as important a factor in driving the numbers up or down as improving or worsening finances.
“For example, since FCA regulation of non-statutory debt management plans began in 2014, a key factor in rising insolvency numbers has been the movement of people from these plans into IVAs, but this shift isn’t always constant and IVA numbers can drop dramatically when these movements stop.
“The effects of improved access won’t last forever though, and the fact that Debt Relief Orders and bankruptcies have levelled off following declines is important to note.
“Bankruptcies are linked to insolvencies with higher value assets and debts, and can often be triggered by the failure of a person’s business or the loss of a job. Although bankruptcy access improved with the switch to an out-of-court process last year, the procedure hasn’t been affected by the same market changes as IVAs and may give a better look at underlying insolvency trends.”