Corporate insolvencies likely to rise in 2014 – R3

MORE than half (56%) of R3 members who work on corporate insolvency believe the number of corporate insolvencies will increase over the next 12 months.

The prediction, from insolvency trade body R3, ties in with the latest insolvency statistics released this week which showed an increase in corporate insolvencies in the first three months of the year compared with the previous quarter and also compared with the same period the previous year.
 
Corporate insolvencies have historically peaked during the early stages of an economic recovery. Insolvencies last peaked during the 2008-9 recession before falling away again as the recovery failed to gain ground.
 
William Ballmann, chair of insolvency trade body R3 in Yorkshire and partner at national law firm Gateley, said: “Sustained economic recovery is very welcome, but many businesses are not out of the woods yet. The early stages of a recovery can be even more difficult for a business to negotiate than a recession.
 
“As the economy starts to pick up, businesses are exposed to new stresses and strains: cash reserves, exhausted by a recession, begin to run out; creditors can become less patient; businesses can grow faster than cash flow or supply chains can cope with; and the consequences of failing to invest during a recession can be felt.
 
“A rise in corporate insolvencies could be seen as confirmation that economic recovery is really underway at last.

“It’s important to remember though that insolvency is not always the end of the road for businesses: it can provide an opportunity to rescue parts of the business and so save jobs.”
 
Sixty-eight per cent of corporate insolvency practitioners said that the wholesale and retail sector is in their top three sectors that could be hardest hit by insolvencies during 2014, followed by hotels and restaurants (57%), construction (47%), manufacturing (26%), and transport and haulage (23%).
 
Corporate insolvencies have been much lower than expected since the recession thanks to low interest rates, the failure of the recovery to gain momentum quickly, and unusual levels of creditor forbearance.
 
Ballmann added: “Many businesses that would have become insolvent in a ‘typical’ recovery have been kept afloat by an unusual set of circumstances. Some of these businesses will have taken advantage of these circumstances to sort themselves out financially, but others are still vulnerable.
 
“The delayed recovery means there probably won’t be as big of an increase in corporate insolvencies in this recovery as there usually is, but we are likely to see some sort of rise. A rise in interest rates before the end of the year would also almost certainly have an impact on insolvency numbers.”
 
November 2013 R3 research found that 166,000 businesses were negotiating payment terms with their creditors, 103,000 businesses were only paying the interest, and 96,000 said an interest rate rise would mean they would be unable to pay their debts.
 
In 2012, the insolvency profession helped rescue approximately 6,000 businesses and helped save an estimated 761,000 jobs (R3/ComRes research).
 
It was announced last month that there had been an increase in corporate insolvencies with statistics for January to March 2014 showing that the number of company liquidations rose by 4.8% compared with October to December 2013, and by 4.9% compared with January to March 2013.