Q1 2018 insolvency statistics – R3 comments

27 April 2018

Commenting on the Q1 2018 (January-March) England & Wales insolvency statistics (published this morning by the Insolvency Service), Duncan Swift, vice-president of insolvency and restructuring body R3, says:

Corporate insolvencies

• Underlying corporate insolvencies rose by 13% in Q1 compared to Q4 2017, and rose slightly by 0.6% compared to Q1 2017.

"Insolvency has risen up the agenda over the first quarter, with a roll-call of high-profile names - Carillion, Maplin, Toys R Us - entering a statutory insolvency procedure, and widely-reported restructuring efforts at a number of other chains, especially in the casual dining space. Crucially, any time a company encounters difficulties there is a 'domino' effect on its suppliers and customers who may face their own financial problems as a result of lost income or key supplies.

"Although there was plenty of support on hand for Carillion's sub-contractors, suppliers and customers from the financial services industry, for example, our members still reported an uptick in requests for advice.

"A raft of profit warnings and lower than expected corporate results in the first three months of the year point to a difficult trading period over the festive season, while Black Friday at the end of November pulled consumer spending forward, eating into the success of the New Year sales. The 'Beast from the East' and repeated episodes of bad weather didn't help, either. Indeed, the growth stats out today indicate there was barely any economic growth in Q1 at all.

"The insolvency figures for January to March may also have been affected by the fact that the end of the financial year is just around the corner in early April. Our members report that this is a relatively common time for directors to take stock of their position, and decide whether or not to keep going.

"Consumer confidence beat market expectations in March, although it's still firmly in negative territory. Looking forward, the rate of pay growth is now slightly higher than inflation, meaning people have a bit more in their pocket to spend, which will be a relief to businesses dependant on the consumer pound.

"A lot of firms in a lot of different industries are facing changes in their sectors which are systemic, not cyclical. In retail, the rise of online shopping and the subsequent need for a seamless and slick e-shop is, for many firms, inescapable. Productivity rises have been sluggish at best for years, and a lot of directors need to take a step back from their businesses to look at where their market is going, and what they need to do to prepare for structural changes.

"It's never too soon for a company to seek expert advice on its market position, and its viability as a going concern. It's tough going for a lot of firms out there, and speaking to a regulated and reputable adviser could make all the difference.

Personal insolvencies

• Personal insolvencies rose 6.8% from Q4 2017 to Q1 2018, and are 8.5% higher than in the same quarter in 2017.

"This latest rise in the number of personal insolvencies is in line with the upwards trend since 2015, and has, again, largely been driven by a rise in numbers of Individual Voluntary Arrangements [IVA]. IVAs are typically associated with consumer debts.

"Given the pressures people's personal budgets have been under, this is perhaps not a surprising result. Although wage rises are starting to outpace inflation again, this will have come too late for some who have gone a long time without a real pay rise. And, as we've said before, while employment rates are high, there are thousands of people in insecure roles, which can make it hard for people to budget.

"The continued availability of cheap credit has made a build-up of consumer credit affordable for some, but not everyone is able to service their debt, even with such low interest rates. Incremental interest rate rises over this year and next will prove a test for personal finances, especially for those who have never known a Bank rate higher than 0.5%.

"Interestingly, bankruptcies, which are associated with larger debts or sudden financial shocks, have started to shift upwards for the first time in a long time. Most of the increase is down to individuals' applications for their own bankruptcy. This may be down to increasing indebtedness, although growing familiarity with the new, simpler online process for bankruptcy applications may have played a part, too. Previously bankruptcy applications had to be made in court.

"It's worth remembering that the official insolvency figures aren't a perfect measurement for the state of the UK's personal finances: they don't include the unknown tens of thousands of people repaying parts of their debts through a non-statutory debt management plan. The insolvency figures are just the tip of an iceberg, and until the government starts to record numbers of debt management plans, which are FCA-regulated, we'll have little idea of the true scale of UK personal insolvency.

"Looking forward, the rise in the National Minimum and Living Wages this April will give millions of people a welcome pay bump, although the higher minimum contributions to auto-enrolment pensions, rising from 1% to 3% of people's earnings, will take a bite out of paycheques at the same time.

"Anyone who is in financial difficulty should avoid burying their head in the sand. Facing up to the extent of money troubles is undoubtedly tough, but it's the only way for people to regain a healthy equilibrium. Talking things through with a professional and qualified adviser will make the process a lot easier, giving people a better idea of their options, and the sooner such help is sought, the better."