Company and personal insolvencies show worrying rise

A financial expert has warned of the dangers of debt as both company and personal insolvency levels rose, statistics for the first quarter of 2018 showed today

Company insolvencies in the first quarter of the year rose by 13% in real terms on the previous quarter to reach the highest level in four years, according to the latest official figures released today.

The figures show that excluding one-off ‘bulk insolvency events’, there were 4,462 business insolvencies in the first three months.

The highest number of insolvencies were in construction, followed by the retail, wholesale and vehicle repair category.

Paul Barber, North West regional chair of the insolvency and restructuring trade body R3, and a partner at Begbies Traynor, said: “Insolvency has risen up the agenda over the first quarter, with a roll-call of high-profile names – Carillion, Maplin, Toys R Us – entering a statutory insolvency procedure, and widely-reported restructuring efforts at a number of other chains, especially in the casual dining space.

“A raft of profit warnings and lower-than-expected corporate results in the first three months of the year point to a difficult trading period over the festive season, while Black Friday at the end of November pulled consumer spending forward, eating into the success of the New Year sales.

The ‘Beast from the East’ and repeated episodes of bad weather didn’t help, either. Indeed, the growth statistics indicate there was barely any economic growth in Q1 at all,” he said.

“A lot of firms in a lot of different industries are facing changes in their sectors which are systemic, not cyclical.

“In retail, the rise of online shopping and the subsequent need for a seamless and slick e-shop is, for many firms, inescapable.

“Productivity rises have been sluggish, at best, for years, and a lot of directors need to take a step back from their businesses to look at where their market is going, and what they need to do to prepare for structural changes.”

He added: “It’s never too soon for a company to seek expert advice on its market position, and its viability as a going concern.

“It’s tough going for a lot of firms out there, and speaking to a regulated and reputable adviser could make all the difference.”

Today’s statistics also showed that personal insolvencies are now at their highest level since 2012, rising by 6.8% in the first quarter compared with the previous quarter.

The number of IVAs (Individual Voluntary Arrangements) is now at a record high, while bankruptcies and debt relief orders also increased.

There were 27,388 personal insolvencies in the first quarter, of which 16,676 were IVAs.

Mr Barber said: “This latest rise in the number of personal insolvencies is in line with the upwards trend since 2015, and has, again, largely been driven by a rise in numbers of Individual Voluntary Arrangements.

“IVAs are typically associated with consumer debts.”

He continued: “Given the pressures people’s personal budgets have been under, this is perhaps not a surprising result.

“Although wage rises are starting to outpace inflation again, this will have come too late for some who have gone a long time without a real pay rise.

“And, as we’ve said before, while employment rates are high, there are thousands of people in insecure roles, which can make it hard for people to budget.

“The continued availability of cheap credit has made a build-up of consumer credit affordable for some, but not everyone is able to service their debt, even with such low interest rates.

“Incremental interest rate rises over this year and next will prove a test for personal finances, especially for those who have never known a Bank rate higher than 0.5%.”

Mr Barber added: “Interestingly, bankruptcies, which are associated with larger debts or sudden financial shocks, have started to shift upwards for the first time in a long time.

“Most of the increase is down to individuals’ applications for their own bankruptcy.

“This may be down to increasing indebtedness, although growing familiarity with the new, simpler online process for bankruptcy applications may have played a part, too.

“Previously bankruptcy applications had to be made in court.”

Looking forward, he said the rise in the national minimum and living wages earlier this month will give millions of people a welcome pay bump, although the higher minimum contributions to auto-enrolment pensions, rising from 1% to 3% of people’s earnings, will take a bite out of paycheques at the same time.

“Anyone who is in financial difficulty should avoid burying their head in the sand,” he said.

“Facing up to the extent of money troubles is undoubtedly tough, but it’s the only way for people to regain a healthy equilibrium.

“Talking things through with a professional and qualified adviser will make the process a lot easier, giving people a better idea of their options, and the sooner such help is sought, the better.”

R3 is the trade association for the UK’s insolvency, restructuring, advisory, and turnaround professionals.