Insolvencies involving larger businesses rise by 10% says Freshfields

4 November 2011
The collective number of receiverships (374), company voluntary arrangements (CVAs) (206) and company administrations (673), all forms of insolvency which typically involve larger businesses, has increased by 10% during July and September, compared to the same period last year, according to the latest set of figures for England and Wales published today by the Insolvency Service and analysed by Freshfields Bruckhaus Deringer’s restructuring and insolvency practice.

Additionally, there were 4,242 corporate insolvencies made up of compulsory liquidations and creditors’ voluntary liquidations (which tend to involve smaller businesses and often sole traders). These represented a marginal increase on the previous three months and a 6.5% increase on a year ago.

For 2011 so far, the real estate sector has accounted for the majority of large business insolvencies counting 708 business casualties followed by construction (517), manufacturing (430) and wholesale and retail (412).

Adam Gallagher, a restructuring & insolvency partner at Freshfields commented: ‘A 10% increase in larger corporate insolvencies totalling more than 1,250 in Q3 is a further stormy cloud gathering above the UK’s economic recovery prospects’.

‘The big concern at the moment is consumer confidence. If news of economic uncertainty around Europe continues it won’t be surprising to see people rein in their spending further as people worry about their own job security. Already we are hearing of many businesses seeing their typical attrition rates all but disappear. Many retailers and their supply chains will be nervous over the all-important Christmas period to hit the New Year with some pace so that their debt financing terms and rent obligations can be met in March.’

‘The sluggish recovery will mean that many companies will need to re-enter talks with their lenders in 2012. Even conservative business plans delivered to lenders during the uncertainty of 2008/9 may begin to look over-ambitious in 2012 unless we see a more significant pace of recovery next year. Those companies who rely on government spending may find their lender conversations particularly tough.’

‘Interestingly, the use of company voluntary arrangements (CVAs) has increased by nearly 30% compared to this time last year. While CVAs have become a popular tool for businesses looking to reduce their rent burden it is sometimes less popular in the landlord community (many of whom have their own debt problems) given the obvious knock-on effect to their finances. However, where the alternative is closure of the tenant’s business many landlords reluctantly prefer to re-base their rent so to maintain occupied premises.’

‘In a low growth, low interest rate world, ‘kicking the can of debt down the road’ is often either the best or least worst thing lenders can do. Forcing a sale or a below – par refinancing today can crystallise a big loss and then risk missing out on the upside recovery. Some creditors are choosing to sit tight and put up with debt situations longer than they would usually and by doing so they are preventing what would otherwise be a more significant increase in insolvencies.’