Back to listing

28/01/2016

How much money are creditors owed from insolvencies?

Our latest Business Distress Index found that 113,000 UK businesses were owed money by insolvent companies and individuals in 2015; that’s around 6% of all businesses.

While it’s easy to ask a sample of UK businesses if they’ve been a creditor to an insolvency procedure in the last year, it’s quite difficult to work out exactly what creditors are owed. Putting together a representative sample of creditors is difficult to achieve, and there is no official tally of insolvent companies’ and individuals’ debts (while much of this information is reported to the government, it isn’t published).

So, exactly how much, every year, are creditors owed when individuals and companies enter an insolvency procedure?
 
There are a few things we can look at to give us an idea.
 
One estimate can be put together using HMRC and Office of Fair Trading (OFT) data, although it’s a rough estimate at best.
 
We know from a 2010 OFT report that HMRC is owed 24% of unsecured debt in insolvencies (although this is based on a small sample size and data that’s at least five or six years old). We also know from HMRC’s tax gap report that the taxman did not collect £4.1bn in 2014 from ‘non-payment’, something which HMRC mostly attributes to insolvencies.
 
A very quick calculation gives us a minimum creditor debt figure of £16bn, which assumes the total debt in unsecured insolvencies is four times what HMRC is owed. Of course, this is just a minimum: the tax gap only shows what HMRC doesn’t collect, not the total that it is owed. £4bn may not be collected, but HMRC will also be owed money that is repaid as a result of an insolvency procedure.
 
On top of this, the £16bn estimate only represents unsecured debt and not the billions of pounds in mortgages and other secured loans lent to insolvent companies and people. The total owed to businesses by insolvent individuals and companies will be far higher than £16bn.
 
There are some other figures to help put things in perspective.
 
Looking at law firms alone, the Law Society Gazette analysis found that firms have entered insolvency owing creditors a total of £300m since the sector was liberalised by the Legal Services Act (parts of the Act were introduced from 2008 onwards, although the Gazette doesn’t give the start date for its calculations).
 
Our own research into the value of the insolvency profession found that in 2014-15, the insolvency profession started work on personal insolvency cases that will repay around £5bn to creditors in the next five years.
 
And, University of Wolverhampton research found that, in 2014, insolvency practitioners in 2% of insolvency cases were using one particular type of legal funding to pursue over £1bn of creditors’ claims.
 
Given that households alone owe something approaching £1.5 trillion in debt, it’s not surprising that billions are owed by insolvent companies and people every year. Exactly how much remains for someone to work out.
 
It is important to note that the number of insolvencies, both corporate and personal, have fallen significantly since the recession. This will hopefully go some way to reduce the amount of money owed by insolvent companies and individuals. But with 2016 looking like it could bring a range of challenges to the economy, we’ll have to monitor the situation closely to determine how creditors are faring.
 
Whatever the amount owed by insolvent companies and individuals may be, thanks to the work of the insolvency profession, as much of that money as possible makes its way back to where it belongs.
 

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.