Paul's New Year predictions

Increase in insolvencies forecast for 2011

As we say goodbye to 2010 and look forward to the start of 2011, I thought that I would give my predictions for 2011 from an insolvency point of view.

Overall, 2010 was a surprising year insofar as the overall numbers of people and companies getting into serious difficulties started to edge downwards, rather than continuing to skyrocket upwards as many had expected. My view is that there are different factors at work in relation to individuals and companies.

For the 'over-indebted consumer' there are a huge number of 'debt management companies' being set up and they are marketing themselves in increasingly effective ways to people with debt problems. There are good and bad firms amongst these organisations and the quality of the advice on offer varies wildly from one firm to another. Most of the solutions offered by these businesses are 'informal' arrangements - ie they aren't legally binding arrangements under the Insolvency Act 1986. This means that they are only lightly regulated and they don't show up on the official statistics, hence they hide the full extent of the nation's personal debt problem.

In relation to companies, whilst the headline figure of liquidations is on a downward trajectory, my view is that the numbers are artificially low because of a number of factors that are keeping terminally ill businesses going for longer than may have been the case in the aftermath of previous recessions. Firstly, interest rates are at historically low levels, aiding struggling businesses by keeping interest payments low. This, of course, cannot last and as interest rates inevitably increase, so will the number of businesses going to the wall.

Secondly, banks are in no rush to pull the rug out from under struggling businesses, as they are aware that much of their security is over valued and they will be unlikely to recover all their debts from a fire-sale. So, as long as a business can service the debt (ie pay the interest) the banks are unlikely to demand repayment and end up testing whether their security really is worth as much as the debt.

Thirdly, HM Revenue and Customs have been uncharacteristically lenient towards businesses that are struggling to pay their tax debts and a huge number of 'Time to Pay' agreements have been made, allowing companies more time to pay off any arrears. But this will not, and cannot, last for ever and there are signs that HMRC are becoming more forceful in their treatment of debtor businesses.

So, my rather gloomy prediction for the year ahead is a sharp increase in failures amongst small to medium sized companies as interest rates edge upwards and the banks and HMRC take a more robust approach to defaulting businesses. Also, bankruptcies and Debt Relief Orders will increase as further job losses occur as a result of public sector cuts. How high will these numbers go? I'm afraid that I'm not going to stick my neck out and put a definite figure on it, but I will watch with interest the official figures for the next 12 months.

But, as always, my message is a positive one: the situation is never as bleak as it may seem and by taking advice as soon as possible, there are things that can be done to rescue a business and avoid bankruptcy. If you would like to discuss the options for either yourself, or for a client, just give me a call on 01709 331300.