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Economy reaches turning point as insolvencies pass their peak

Insolvency Index: latest figures for all types of company failure are down year on year

The fall in insolvencies does suggest that the economy is on the upturn

Clive Lewis, head of enterprise, ICAEW

Company failures in the UK have reached a turning point as all types of insolvencies are falling, analysis by Exaro reveals. It marks a potential turnaround for the UK economy.

The number of UK companies that submitted formal notices for each of four categories of insolvencies in June dropped compared with the same month last year.

The figures from the Exaro Insolvency Index suggest that the peak of company failures in the wake of the credit crunch has passed.

However, the figures may signal only a temporary reprieve. Worries remain about a rise in interest repayments following any future decision by the Bank of England to lift the base rate from its historic low of 0.5 per cent.

Nonetheless, Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales (ICAEW), said that Exaro’s figures gave cause for hope. “The fall in insolvencies does suggest that the economy is on the upturn. But when interest rates return to normal, this could cause a rise in company failures,” he said.

Lewis, who covers issues relating to small and medium-sized enterprises (SMEs), believes that the figures also offer hope that some “zombie” companies, those able to service the interest on their debt but unable to repay capital, may spring back to life.

He said: “The extensive period of low interest rates has allowed many so-called zombie companies to reduce their debts to a more manageable size. If current growth trends continue to improve, they may well have a viable future.”

The Exaro Insolvency Index, which tracks all company failures throughout the UK, shows that all four categories of insolvencies fell last month compared with a year before.

These categories cover: administrations or receiverships, which fell 25.7 per cent in total from 202 companies to 150; winding-up petitions, down 17.9 per cent from 703 to 577; resolutions or court orders to wind up companies, falling very slightly from 1,586 to 1,582; and appointments of liquidators, dropped 7 per cent from 1,548 to 1,440.

The falls are shown in the top graph to the right, which can be clicked to enlarge.

The second graph shows the quarter from March to June, which sees two of the four categories down compared to 2012, while the others are up.

In last month’s Exaro Insolvency Index, three of the measures decreased year on year, but the number of winding-up orders or resolutions rose. It also showed that the level of insolvencies was running far higher than before the credit crunch, with liquidations four times greater.

It also showed that company failures started to rise sharply in May 2007, some four months before Northern Rock sought emergency funds from the Bank of England. The figures provide an early signal of the economy’s overall direction.

The previous month’s Exaro Insolvency Index showed a fall in the number of companies that entered administration or receivership compared with 2012, but all three other measures increased.

Some key sectors have also evidently reached a turning point in insolvencies. All four categories of company failures operating in administrative and support services fell in June compared with last year, as shown in the third graph to the right.

The number in each category fell by between more than a fifth and nearly half.

The sector, which includes the leasing of cars and office machinery, as well as call centres, has a high number of company failures in absolute terms.

The same is true for the construction industry, and it too saw a fall in all categories of insolvencies last month, as shown in the fourth graph. Construction is viewed as a bellwether for the economy, and the sector’s figures also suggest that the worst is over for business in the UK. However, the number of winding-up petitions for construction companies was down by only one, from 117 in June 2012.

Exaro’s analysis is based on insolvency notices as published in the London, Belfast and Edinburgh Gazettes. Insolvency notices must be submitted to these publications to cover the whole of the UK. A small proportion of companies is not ascribed to a specific sector in the source data.

The Exaro Insolvency Index provides a detailed analysis of company failures in the UK – a key economic indicator. A bespoke service is available. If you are interested in buying a regular, specialised bulletin that enables you to track the data – including lists of company failures – in specific sectors or geographical areas, please e-mail news@exaronews.net, putting in the subject line: Exaro Insolvency Index.

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