We have all seen numerous articles and tv and radio programmes covering the growth in personal insolvencies and out of control consumer credit. However for much of the last 5 years the company insolvency figures have grabbed far fewer headlines – the figures have been unspectacular.
The following graph summarises the corporate insolvency figures for the 5 years to 31 March 2010:
As you can see, the number of companies failing was relatively low, and consistently so, until 2008. A good many more companies failed in 2008 because they did not have the resources to survive any major deterioration in their turnover, margins or cash flows. At that time the banks were themselves in serious trouble and focussing on their own problems – they stopped lending and were clawing back what cash they could from anywhere, even if it meant pushing some businesses to the wall. Furthermore, HM Revenue & Customs’ Business Payments Support Scheme was not put in place until very late in 2008 and only really got going in the following year, 2009. For much of 2008 companies had nowhere to turn to for cash.
So why then did the figures not continue to rise going into 2009, given that conditions in the economy had not improved and the banking sector has still not changed its attitude to new lending? The answer lies in three main main areas. Firstly, according to former government’s 2009 pre-budget report , HM Revenue & Customs have admitted to having supported 160,000 businesses employing 1.2 million people, delaying payment of £4 billion in tax. The scale of HMRC support to Great British Business should not be underestimated: if only a small proportion of these had have gone to the wall, the insolvency figures would have been very different indeed. Secondly, the banks are not, generally, pulling the plug on businesses. Sure they are making things difficult for businesses by asking for more security and reducing lending, but they are trying not to put businesses into administration. Those that do fail are often falling on their own sword. The banks’ approach may be as a result of pressure from the government. More likely it is because banks see managing down their exposure over time as a better option than crystallising a certain shortfall now – there are few buyers of businesses, especially those that are struggling, in the market. Thirdly, the Bank of England has through its policy of quantitive easing, pumped a huge amount of money, £200 billion, into the economy in just one year. Even allowing for some seepage of this money overseas, it makes you wonder what state the economy would have been in, and at what prices UK government debt would be trading, had this cash not been pumped in?
What does the future hold? Will insolvencies rise again or have we reached a plateau?
We know that previous recessions have seen more businesses fail as the economy comes out of a recession than as it goes into or through it – this is because businesses simply run out of cash when there are more demands on it. A good number of insolvency practitioners have built up their teams expecting to get busier. But this assumes a short, sharp, exit from recession rather than a gradual one. From where I sit I see this recession, if indeed it has ‘finished’ as having a long tail. I also see this recession as having far more uncertainties attaching to it than previous ones, uncertainties which could cause a deep, indeed far depper than we have already experienced, double dip. These uncertainties include: having pumped £200 billion into the economy, will or can the Bank of England pump any more money in? If it doesn’t, what does this mean for government borrowing (arguably the price of which is being supported artificially by the Bank of England’s quantitative easing)? Will HMRC’s support continue on previous levels, and if so for how long? I have seen, over time, debt structures within ailing businesses change, to the detriment of HMRC – how long will they allow this to continue at a time of already reduced tax revenues? Will European debt woes effect our ability to maintain government spending at levels which do not throw our economy into a tailspin in the short or long term?
I hate to say this but if I had any money to wager, I’d bet on things getting much, much, worse before they then start to get any better. This is going to be a long haul, with no one, not even Insolvency Practitioners, being immune to the pain.