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The insolvency crisis looms

Monday 1 November 2010 - by Vernon Dennis

 Vernon Dennis, head of corporate recovery at Howard Kennedy, wonders if a corporate insolvency crisis in the UK has been averted or whether these problems have simply been stored up, only to explode further down the line

Following four consecutive quarters of economic growth is it now time to put behind us the spectre of widespread corporate insolvencies?

Previous recessionary cycles suggest that there is a 12-18 month lag between recessionary peak and insolvency peak.

As a result one would have predicted that 2010 would see a large rise in corporate insolvencies.

Instead, comparing Q2 2009 and 2010, we have seen a fall in liquidations of 19 per cent and of administrations 24 per cent. So with the economy on the mend has a crisis been averted?

Unfortunately there is every indication that rather than taking necessary steps to restructure and resolve current problems, the unique events and causes of the last recession have meant that lenders and borrowers alike have simply postponed dealing with their problems.


It is true to say that economic growth may mean that companies (like individuals) can start to pay down their debt burden.

However the recovery is fragile; retail spending is falling and according to figures released by the Halifax, UK house prices crashed in September by 3.6 per cent, the largest monthly fall since 1983.

Also on the horizon is the cut in public spending of £81bn worth resulting in over 490,000 jobs losses by 2014.

Those companies dependant on the public sector will undoubtedly suffer and a domino effect could endanger the growth required from the private sector, if a double-dip recession is to be avoided.

With tougher regulation and stricter capital adequacy demands, bank lending, the key driver to any sustained recovery is however unlikely to return to normality until balance sheets are improved.

It is against this background that even in the case of borrower default rather than taking recovery action and flooding the market with distressed assets, as occurred in the 1990’s, banks are wherever possible pursuing alternative remedies with an aim of avoiding the crystallisation of bad debt.

Where ‘forced’ this may include moving assets into subsidiary SPV’s, funding a ‘connected’ purchaser of a businesses assets to the extent of the banks existing debt, or agreeing to ‘amend and extend’ facilities.


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