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09/11/2012

Corporate liquidations down 30% due to greater rescue culture

Corporate liquidations down 30% due to greater rescue culture

The Enterprise Act was enacted into Parliament exactly 10 years ago this week

The number of corporate liquidations is 30% lower during this recession than during the economic trough of the 1990’s and this is due, in part, to decade old legislation which encouraged a business rescue culture according to the insolvency trade body R3. R3 believes that the 2002 Enterprise Act has encouraged rescue and recovery over liquidation and closure and that this has helped preserve more businesses that would otherwise have failed in earlier recessions.

There were 16,886 company liquidations in England and Wales during 2011 which is nearly 8,000 fewer than the peak which occurred during 1992 when 24,425 businesses were put into liquidation. This is despite the current recession being deeper and longer lasting than in previous decades.

Lenders have undoubtedly been more sympathetic and interest rates are at historically low levels but it is clear that there is another factor involved in keeping the corporate failure rate at a lower than expected amount.

Lee Manning, President of insolvency trade body R3 comments:
“When the recession began in 2007/2008 there was widespread speculation that there would be a corporate ‘bloodbath’ and businesses would fail in record numbers yet it is clear that these predictions never materialised. Many doubt now they ever will.”

“In the past there was an ‘insolvency lag’, with liquidations rising three years after the end of the 80’s recession, and two years after the 90’s recession, as creditors felt able to improve on their returns. This hasn’t happened this time, with the liquidation rate currently at 0.7%, against a peak of 2.6% in 1993.”

Lee continued: “This is due to a culture change begun with the 2002 Enterprise Act which encouraged the saving of businesses rather than their liquidation. An example occurred when I was fighting to save Oddbins. We started with a loss-making Company with over £20m worth of debt and a substantial unprofitable store portfolio, which a CVA proposal was created to address. The Act allowed an Administration contingency plan to be developed that could be implemented quickly and without substantial administrative cost, should the CVA fail to be approved by creditors. Post-Enterprise Act, we didn’t have to prepare an additional and expensive pre-administration report for the Companies Court to place the company in administration after the CVA was rejected.”

“In the end HMRC, owed more than 30% of the debt, voted down the CVA, but we had a viable second option. Despite the failure of the CVA proposal and the consequent Administration, we were able to save 43 stores, of which 35 still trade under the Oddbins name.”

The origins of the Enterprise Act came from Peter Mandelson’s visit to Silicon Valley in 1998 to import the American ‘entrepreneurial’ spirit to the UK business culture, whilst reducing the stigma of failure which was then entrenched in UK business. In 2002 the Enterprise Act fundamentally altered our insolvency regime, reducing bankruptcy from three years to one, while favouring ‘business rescue’ over liquidation.

“The Act introduced a streamlined administration procedure, with the principal aim to rescue the Company rather than subjecting it to a break-up or liquidation process, thereby preserving jobs. The Act reduced procedural costs by removing the requirement for a detailed report to be presented at Court to have an administrator appointed.”

Lee concluded: “The views of all creditors became important in the process rather than just the secured creditor (bank) as the duties of care for the appointment taker evolved. The new regime promoted the rapid rescue of ailing businesses or even the restoration of the Company itself through a CVA, which is being used more than ever this year. Businesses in the retail sector since the start of 2011 have emerged from administration with over half the jobs and stores intact on average and corporate insolvencies have not spiked. This is good for sustaining employment and also aids future growth in the economy. Saving a business is always more productive than closing it down and I believe the ten year old Enterprise Act has encouraged a greater rescue and recovery culture which will benefit the economy when it starts to pick up.”

For further information please contact:

Will Black, R3 Communications Manager
t: 020 7566 4215 m: 07917 422 485 e: will.black@r3.org.uk


Notes to editors:
R3 is the trade body for Insolvency Professionals, and is made up of 97% of the UK’s Insolvency Practitioners.
R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by one of nine recognised professional bodies.
R3 stands for ‘Rescue, Recovery, and Renewal’ and is also known as the Association of Business Recovery Professionals


 


 


R3 Press Office

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.