Economic problems continue but insolvencies fall – what gives?

Guest post regarding the current economic climate and corporate insolvencies.

One of the features of the current economic climate is that there is so much conflicting data and opinions about what’s really happening.

Searching for economic news on any given day, you will probably find one survey or another which will suggest that the worst of the economic decline is over, whilst on the same day there will be another suggesting all is doom and gloom. This contradiction even applies to economic figures which can be unclear depending on the time period, method of measurement and so on.

What does appear clear is that the number of corporate insolvencies is on the decline according to most surveys and available data, including this recent report quoting the highly respected Experian as source material.

On the face of it, the above would seem to be good news and a good indicator that things are getting better. Or perhaps not ….

As specialist insolvency solicitors, we liaise with and speak to creditors and Insolvency Practitioners on a daily basis. What they tell us and we know from experience is that formal insolvency numbers are misleading. There are probably many more businesses in financial distress that for many years and the reason they do not appear as insolvent is that action has not been taken to declare them insolvent.

In turn, the reason why many companies are not subject to formal insolvency action by creditors is largely twofold :-

  1. It is expensive to wind up a company involving court and other fees
  2. There is no point winding up a company if you will not potentially recoup the most amount possible. It may be better to wait on the basis that the company has a chance of doing better in the future, under better economic conditions, so a wait and see approach may be preferable.

Aside from the above considerations for general business creditors, the most likely and largest creditors tend to be thee and banks. In the same way as with residential mortgages, where there is by all accounts a huge amount of potential distress by borrowers, for political reasons, the Inland Revenue and banks are probably also holding back in the knowledge that a huge wave of insolvencies will be almost certain to have very severe knock on effects on the economy generally, jobs, ability to pay mortgages and so, making the whole situation worse and not better.

Notwithstanding that for the reasons given above, many creditors are probably holding back from insolvency proceedings, directors of insolvent companies should be very careful and should remember that continuing to trade while insolvent carries with it significant legal risks and possible personal liability. That issue is a topic for a future blog post.

This post supplied by J E Baring Solicitors, who are specialist insolvency solicitors.

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