The reduction in 2009’s corporate failure figures is the result of an increase in personal insolvency, new figures suggest, as many business owners take on personal debt to save their businesses.
Official figures released today by the Insolvency Service revealed a 1.7% drop in the number of corporate liquidations in the fourth quarter of 2009 compared to the previous three months.
There was also a 39.7% decrease in other corporate insolvencies (including administrations and company voluntary arrangements) in Q4 compared with the same period a year ago, and a 12.8% decrease in administrations compared with Q3.
Graham Rusling, managing director of Barclays Business Support, said the banks’ efforts to keep companies trading through the downturn had kept the number of corporate insolvencies down.
He said: “This focus has kept corporate insolvencies lower than predicted in 2009, which we see in today’s figures, and will continue well into the recovery.”
However, today’s figures also showed that there were 35,574 individual insolvencies in the final quarter of 2009, bringing the total number of people declared insolvent last year to a record high of 134,142.
According to Baker Tilly, one in every 320 adults in England and Wales entered a formal insolvency process (bankruptcy, Individual Voluntary Arrangement or Debt Relief Order) in the calendar year 2009.
Martin Williams, managing director of credit referencing agency Graydon UK, believes the number of companies going bust has been cushioned by the surge in personal insolvencies, as research released earlier this week revealed that over a third of small business owners had taken on personal risk to keep their companies afloat.
The study by Graydon UK and the Forum of Private Business (FPB) found that bank lending conditions had prompted 28% of entrepreneurs to turn to friends, relatives and company directors to secure capital for their businesses, while 8% had used directors’ personal credit cards.
Some 40% of those looking for credit during the second half of 2009 were unsuccessful, with 52% refused business loans and 38% turned down for extensions on their overdraft facility.
“Of course lots of people have lost their jobs and got into financial difficulty, but the surge in personal insolvencies has also been fuelled by business owners using their personal credit cards to prop up their companies,” he told Growing Business.
“We believe many companies are trying to stave off administration by going to friends, family and building up credit cards.”
However, Williams is anticipating an increase in the number of corporate insolvencies as the recovery continues, which has been witnessed in previous recessions, along with many insolvency practitioners.
He said: “I think the number of administrations and liquidations will go up in 2010, because companies often have cashflow problems coming out of a recession when they’re trying to build up their business to take advantage of the upturn.”
David Hudson, London head of corporate insolvency at accountancy firm Baker Tilly, added: “While government officials may breathe a collective sigh of relief today, they are not really in a position to rest on their laurels. All eyes should be on the financial impact for UK PLC, as government funding support falls away and debt takes control.
“With the Bank of England calling time yesterday on the quantitative easing programme, HMRC’s toughening stance on ‘time to pay’ agreements and previously lenient landlords becoming harder in their rent demands, administration figures will rise again.”
© Crimson Business Ltd. 2010