Company failures are 'tip of the iceberg'

Personal insolvencies could top 150,000 this year, suggesting UK economy is not through the worst

• Larry Elliott and Hilary Osborne
• guardian.co.uk, Friday 1 May 2009 19.34 BST
• Article history

Insolvency experts warned today that a 59% annual jump in failing companies was "the tip of the iceberg" as official figures highlighted the impact of Britain's plunge into recession on the hard-pressed corporate sector.

Evidence that tighter credit, falling demand and a weak property market are pushing an increasing number of individuals and companies over the brink blunted fresh evidence that the economy may be through the worst of its downturn.

Data from the Insolvency Service showed that the number of failed companies stood at 6,724 in the first three months of 2009, when the economy shrank by 1.9% and claimant count unemployment rose by almost 290,000. Corporate insolvencies were up 6% on the quarter.

Personal insolvencies increased by 1.6% on the quarter to 29,774 and were 19% higher than in the first three months of 2008. Although the Chartered Institute of Purchasing & Supply reported that conditions for manufacturing were less bad than a month ago, insolvency practitioners warned of more bad news to come.

Liz Bingham, head of restructuring at Ernst & Young, said: "As worrying as these figures are, this is just the tip of the distress iceberg. Many more companies and individuals are being restructured outside of formal processes and the figures do not include those companies that are effectively dead in the water, but lacking the triggers that force intervention. The number of corporate insolvencies has once again risen significantly, but we fear that the worst is not yet over for many UK businesses as the economy continues to contract and credit remains constrained."

A breakdown of the government's figures showed personal bankruptcies rose by just under 1% to a record 19,026 in the first quarter of this year, with more than 10,000 people entering into individual voluntary arrangements with creditors.

The accountancy firm KPMG said personal insolvencies would continue rising as a result of company failures, increasing unemployment and the introduction of the new debt relief orders (DROs) last month. DROs allow consumers with debts of less than £15,000 and minimal assets to write off their debts without entering into a full-blown bankruptcy.

Mark Sands, director of personal insolvency at KPMG, said: "We expect this new approach to increase the number of people using personal insolvency as the way to deal with their debts. In KPMG's view, DROs, together with the expected increase in unemployment, are likely to lead to record levels of personal insolvency of more than 150,000 in 2009."

The Insolvency Service said that though bankruptcy represented a means for households to relieve financial pressure, it should not be seen as an easy option for those who accumulated debts recklessly.

The CIPS/Markit monthly snapshot of industry showed its second successive monthly rise, with its purchasing managers' index up from 39.5 to 42.9. Any reading below 50 indicates that factory output is contracting.

Roy Aycliffe, director at CIPS, said: "Although April saw some reprieve for the UK manufacturing sector, we are still far away from a turnaround and the industry is still firmly embedded in the trenches of recession." He added that there had been a welcome pick-up in output and orders, but a third of firms laid off staff to cut costs.