Latest trends in insolvency - good or bad news?

Jun 21 2007 By Neil Harrold, The Journal

Neil Harrold looks at the latest trends in corporate and personal insolvency.

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The statistics published by the Insolvency Service on the number of corporate and personal insolvencies paint a seemingly paradoxical picture.

On one hand, the number of personal insolvencies has reached a record high. In the year ended March 31, more than 113,089 people either became bankrupt or entered into an individual voluntary arrangement (IVA) with their creditors, an increase of 46% on the preceding year.

More positively, the number of corporate insolvencies has fallen, albeit less dramatically, over the same period, with the number of insolvent liquidations down by 5%. In a similar vein, the number of administrations, receiverships and company voluntary arrangements were all lower in the first quarter of this year than in the corresponding period last year.

What is the reason for this apparent paradox? A more detailed examination of the bankruptcy statistics contains a clue. While the total number of bankruptcy orders increased by 33%in 2006, the number of self-employed bankrupts remained virtually constant throughout this period, at about 10,800 in each year.

In other words, the growth was entirely driven by "consumer" bankruptcies, which now represent 83% of all bankruptcies, compared to less than 50% in 1998.

The growth is even more pronounced in the number of IVAs, characterised by the rise of mass-market advertising by the so-called "factories" targeted at over-indebted consumers, with the numbers more than doubling between 2005 and 2006. Indeed, the total numbers of IVAs in 2006 were more than quadruple the numbers in 2004.

The conclusions that can be drawn from this are:

* There has been a relatively benign environment for business (although the series of interest rates rises over the last several months may yet have an effect on the 2007 statistics).

* There has been a significant and sustained change in the willingness of consumers to entering into formal insolvency, whether by presenting their own bankruptcy petition or by proposing an IVA, with much of the stigma of bankruptcy perceived to have been lifted following recent changes made to the insolvency legislation.

* All creditors - but particularly financial institutions - are needing to make significantly higher provisions against bad debts incurred by defaulting borrowers.

* The cost of default is indirectly met by everyone, in particular by retailers and lenders increasing margins to provide for bad debts.

* Access to credit may be restricted for certain groups perceived to be at high risk of default (for example, students).

* The above factors - together with "belt-tightening" by over-indebted consumers - is likely to affect the level of high street spending and consumer confidence, with potential implications for the wider economy.

• Neil Harrold is a licensed insolvency practitioner and partner at Hay & Kilner Solicitors. For further information contact him on (0191) 232-8345 or email neil.harrold@hay-kilner.co.uk