The number of companies closed due to insolvency in 2009 increased by nearly 23% over the previous year with little hope for improvement in 2010.
According to figures published by the Insolvency Service on Friday, during 2009 nearly 19,000 companies were closed because they were unable to pay their debts.
This was a rise of nearly 23% over the number of insolvent
companies recorded in 2008.
The insolvency service records business failures in terms of companies which were forced to close by their creditors (compulsory winding up) and those which made their own decision to close because they could not afford to pay their bills (voluntary winding up).
Is the rate of insolvencies slowing?
The headline that was widely reported in the press last Friday was that there seemed to be a levelling off in the number of failed companies in the second half of 2009 with the number of failed companies reducing by 1.7% in Q4 compared to Q3.
However, this prediction seems optimistic. You have to take into account the “Christmas Effect” where the court system effectively closes for 3 weeks between mid December and early January thus slowing the processing of insolvency cases.
It is also possible that a number of companies have avoided closure because of government help such as the HM Revenue and Customs time to pay scheme which allows companies to defer tax payments.
Although welcome in the short term, the problem with this scheme is that tax is still owed and will have to be paid eventually. As such, the worry is that businesses are simply storing up problems for the future.
Gloomy outlook for 2010
The economic outlook for 2010 does not bode well especially for smaller businesses which are less able to weather the financial storm.
VAT has now returned to 17.5% adding an additional burden to the cost of running a company. There is also speculation as to whether the Government may have to increase corporation tax on small business as it tries to reduce the public borrowing requirement.
Many companies continue to struggle to raise finance for investment or simply to support cash flow.
According to research carried out by CreditPal, bank lending decisions are not being made on the financial strength of individual companies, but rather on the sector that they operate in. As such, for companies operating in sectors which have suffered most in the recession, borrowing is almost impossible.
An insolvency domino effect
As business struggle to survive into 2010, they are likely to put increasing pressure on their suppliers. Payments will be withheld for as long as possible. If and when a company fails, it is likely that the other businesses it owes money to will get little or nothing in return.
Unfortunately, the knock on effect will be that other firms will also be starved of cash and more will find themselves under financial pressure.
In an environment where bank lending is restricted, there is little opportunity for firms to tide themselves over by borrowing. As such, many who are faced with increasing bad debts will also be forced into liquidation.
Faced with these challenges and given that government help for the economy seems to have been halted and may in some areas even start to be reversed, I do not think that the outlook for businesses will become any better in the next 12 months. As such, I fear that the number of company insolvencies is set to continue rising.
Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK. http://coopermatthews.com