Insolvency 2015 – What’s Next?
The Insolvency Service Statistics – what do they say?
On 29 April 2015, the Insolvency Service released their latest statistics for quarter one of 2015. The statistics echoed what many had already predicted – further drops in company and personal insolvencies across England and Wales, and a suggestion that a more buoyant economic market is arising.
With the total company insolvencies at their lowest since the fourth quarter of 2007, (with 4,052 less than quarter four of 2014 alone) and personal insolvencies decreasing for the third consecutive quarter (to the lowest since quarter 4 of 2005), the statistics show an economic improvement, and perhaps even an increased awareness of the need to budget in todays turbulent society.
Whilst compulsory liquidations have increased for the first time since quarter 1 of 2014, suggesting a preference of compulsory liquidation by many companies over England and Wales, this is the only figure to have grown over the last quarter.
The question is then, what happens next? Are the statistics a true representation of the current climate? And perhaps more importantly, are these statistics an accurate indicator of the forthcoming years?
Legislative Changes – October 2015
Further legislative changes are due to come into effect in October 2015. These changes raise the threshold debt required for a creditor’s bankruptcy petition from £750.00 to a debt owed of at least £5,000 and also make various changes to the eligibility criteria for debt relief orders.
Serving a statutory demand and subsequently threatening bankruptcy has long been used as an instrument to obtain payment where the debt is not in dispute. However, once these changes have been implemented and the debt is lower than £5,000, this option will no longer be available to those seeking to recover funds.
According to Giles Frampton, the former President of R3 (the insolvency trade body), “The changes will make it much easier for indebted individuals to deal with their debts effectively . . . £750 was an entirely inappropriate level”. This attitude is unlikely to be reflected by those owed funds however, who will instead be encouraged to make a claim with the Court; obtaining a judgment in their favour and enforcing it accordingly. On this basis, it seems logical to say that figures for bankruptcy are likely to drop over the next few years.
What can Creditors do to deal with these changes?
There are, of course still various options available to those seeking to recover outstanding sums. The route most likely to be encouraged by insolvency practitioners is that of issuing a claim with the County Court. Once issued (and if there is no dispute or the claim is not defended) a creditor will obtain judgment in their favour, upon which they can act and enforce for example, by instructing Court Bailiffs or High Court Sheriff’s to take control of goods, or applying for an Attachment of Earnings order.
What happens next?
Given the continuing trend of decreasing statistics, we must consider what may happen next in the realm of debt recovery. Whilst figures suggest positive changes for debtors, the position of creditors is perhaps a little more uncertain, with alternative methods of recovery being encouraged.
Nevertheless Graham Bushby, Partner and National Head of Restructuring and Recovery at Baker Tilly comments that, “the statistics don’t really tell the whole story as there are many companies still experiencing financial distress and a number of reasons why we could see insolvency levels rising again within the next one to two years”. Clearly, many experts believe that these low figures are merely a ‘blip’ and anticipate that numbers may again soar over the next few years.
Richard Woolhouse of the British Banking Association explores one of the reasons for this. “There appears to be broad confidence about the economy, which the banks are supporting through affordable credit, leading to rises in borrowing across the board”. With the market picking up, there is an overwhelming risk of overtrading, with companies keen to capitalise on the changes. Directors need to ensure they avoid getting their companies into financial difficulty once more.
Moreover, whilst many companies are repaying their outstanding debts, this is being done on an interest only basis. This avoids them entering into insolvency procedures, but means that they also fail to pay off any capital.
Finally, there has been a trend for banks to sell off their non-core bad debt books to private equity groups. Whilst working through book debts, there has been a prioritisation of companies from whom the bank can realise assets first. However, as time passes and the focus shifts to more distressed companies, there may be no alternative but to enter them into insolvency procedures.
Obviously only time will tell if the Insolvency Service statistics will again increase. Following a Coalition government who saw a record high of personal insolvencies in 2010, turning things around to produce figures at their lowest since 2005 at the end of their term, it is expected that the Conservatives will want to continue to see figures fall. Nevertheless, if predictions are true, insolvency practitioners may once more find themselves extraordinarily busy before they know it.
For more information on this, please contact Andrew Pay on 01392 455972