Credit Management September 2023

INSOLVENCY
AUTHOR – Sean Feast FCICM
entrepreneurship. On the most recent
data that I could find, a very quick search
over 50% of incorporated UK companies
have been incorporated under four years.
“However, and if you review past
statistics they indicate, a significant
number of these new businesses were
likely to fail within the first four years.
Past trends have this at circa 50% will not
celebrate their 4th year anniversary.
“But given these 'furlough
entrepreneurs' may not have had the
experience, capital, grit or resources
to navigate their business successfully,
maybe in time, once the data is available
it will show this spiking. I think that its
plausible that this could be contributing
to the increase in insolvencies we are
seeing now.”
Gary thinks that the decrease in
companies dissolved in 2020/21 may
also play a role: “During the pandemic,
the UK Government put measures in
place to protect businesses, including
temporary restrictions on bankruptcy
filings, subsidies, loans, and other types
of financial support. A possible further
contributor to delayed dissolution of
some companies that maybe were already
in financial distress before the pandemic.
Now that these measures are being lifted,
I would expect to see some levelling out
and these companies contributing to the
increase in insolvencies.
“It's also important to consider
other factors beyond the 'furlough
entrepreneurs' hypothesis and the post
Covid Lag,” he continues. “For instance,
changes in market dynamics, financial
policies, or global economic conditions
could also be contributing to the increase
in insolvencies. Credit managers that
are rightfully concerned by the recently
reported high number of insolvencies
that it may not be as bad as it looks.”
Meanwhile, and perhaps counterintuitively,
the number of individuals
entering a personal insolvency procedure
has actually dropped to its lowest
quarterly level since Q3 2020. This is
heavily fuelled by a reduction in IVA
registrations in the quarter.
The seasonally adjusted figures from
the Insolvency Service, reveal that there
were 26,390 individuals entering either
bankruptcy (1,826) a debt relief order or
DRO (7,106) or an individual voluntary
arrangement or IVA (17,458) in Q2 2023.
IVA numbers were down 12 percent
on the previous quarter and dropped
22 percent when compared to the same
quarter in 2022. For the second quarter
running, DRO numbers broke the 7,000
barrier, increasing one percent in the
period and by 23 percent when compared
to the same quarter in 2022.
Interestingly however, bankruptcy
numbers rose for the second successive
quarter and recorded the highest number
since Q4 2021.
Nicky Fisher says that the fall in
IVAs suggests that the ongoing cost of
living crisis isn’t translating into more
people requiring a personal insolvency
process at present: “However, the rise
in bankruptcies and Debt Relief Orders
suggests that more people are unable to
make almost any kind of contribution to
repaying their debts this quarter, so have
turned to these processes in an attempt to
resolve their financial issues.
“Making ends meet is still a key concern
for many. People are living in a world
where it costs more to keep a roof over
their head, put food on the table and keep
the lights on, so they’re only spending
money on the essentials. Alongside their
money worries, job security and the
health of the economy are key concerns
for many people – while rising interest
rates could affect their ability to pay
or secure mortgages in the future, and
inflation levels will continue to push
costs up.
“An increasing number of people are
turning to credit cards to pay bills or
pay for the basics, which is concerning
as people in this position are just one
financial shock – like an unexpected bill
or a cut in hours at work – away from
becoming insolvent.
The rise in the number of DROs is
certainly causing angst within the debt
advice lobby. Jane Tully, Director of
External Affairs at the Money Advice
Trust says the rise “is reflective of the
impact that high costs are having for
struggling households.”
Breathing Space registrations also saw
an increase, rising by 37 percent percent
over the same period. In June 2023 there
were 7,825 registrations for Breathing
Space, of which 111 were on the grounds
of mental health.
Jane says the figures are a worrying
sign of households under strain, with
more people facing little option but to
seek a solution for their debts: “Debt
Relief Orders provide a vital route out of
debt for people experiencing financial
difficulty, while Breathing Space gives
people who have fallen behind on
repayments a much-needed pause on
creditor action while they seek advice for
their debts,” she explains.
“But insolvency options should not be
undertaken lightly and it is crucial that
people receive free, impartial debt advice
before deciding the best course of action
to take.”
‘‘Redundancies
nationally also
remain at very
low levels. British
companies and the
economy in general
are exhibiting much
more resilience
than many were
predicting last
year.”
Brave | Curious | Resilient / www.cicm.com / September 2023 / PAGE 28