Don’t panic on insolvencies – at least not yet says Midlands analyst

BUSINESSES in the Midlands have been warned not to panic following an increase in corporate and personal insolvencies over the summer.

Chris Radford, partner at Gateley in Birmingham and chairman of R3 Midlands, said the Q3 rise in insolvencies was not necessarily an indicator of ‘Brexit’-related financial problems for companies.

“At least, not yet,” he said. “While businesses dependent on imports are struggling with the falling value of the pound, anecdotal evidence from our members suggests the vote to leave the EU has not led to more insolvency procedures due to factors other than the exchange rate.

“However, we are hearing that more companies have been coming to restructuring experts for advice.”
 
Mr Radford said that so long as the economy continued to grow steadily, insolvency numbers were unlikely to rise too much, although this would depend on what impact ‘Brexit’ has on the economy.
 
“Corporate insolvency numbers stabilised earlier in the year around pre-financial crisis levels following a prolonged downward trend, and insolvency numbers are pretty much in line with where they were this time last year. Occasional quarterly increases are not unexpected,” he said.

He said the rising cost of living and reforms to make personal insolvency procedures more accessible had combined to push insolvency numbers sharply up over the last quarter and in comparison to this time last year.
 
“Individual Voluntary Arrangement numbers, which make up the bulk of personal insolvencies, are sensitive to the cost of living,” said Mr Radford.

“IVAs fell rapidly from 2014 onwards as wage growth finally overtook inflation after the financial crisis. Having plummeted towards 0% in 2015, inflation has been rising again this year and IVA numbers have followed.
 
“Consumer debts are on the rise and savings rates are incredibly low so it’s very easy for even a small financial shock to make someone insolvent. Although wages are outpacing inflation in the economy overall, there are people on the financial edge for whom any increase in the cost of living could cause problems. When people do run into financial difficulties now, there is very little room for manoeuvre unless they act quickly and seek advice.”
 
He warned the falling value of the pound post-‘Brexit’ referendum would continue to put pressure on wages and IVA numbers could be a useful indicator for how the vote to leave the EU was affecting personal finances.
 
“Meanwhile, access to bankruptcy and Debt Relief Orders has been reformed. The welcome increase of the debt and asset limits for DROs in late 2015 means more people have been able to sort out problem debts through the formal insolvency regime than ever before,” he added.

“Access to bankruptcy is not so straightforward – accessing bankruptcy has been made easier by the government’s decision to switch to an online adjudicator process for some cases rather than require people to petition for their own bankruptcy through the courts.  The Government, however, increased the basic fees it charges for every bankruptcy case by over 30% in July 2016, which may deter those for whom bankruptcy is the best solution.”