In welcome news for the business community, corporate insolvencies are down according to the Insolvency Service. There were 4,082 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the first quarter of 2010 (on a seasonally adjusted basis). This was a decrease of 8.4% on the previous quarter and a decrease of 17.8% on the same period a year ago. Company Voluntary Arrangement (CVA) numbers have remained stable and have been seen as a useful rescue tool.

However, for people in the industry there is a feeling that the figures are only lower due to the HMRC “time to pay” policy where businesses can negotiate very good terms to pay VAT and PAYE owing. The Begbies Traynor Red Flag Alert backs this up as it has reported an increase in businesses facing financial problems that have not been reflected in the insolvency figures. The significant debts owed by businesses to government have not been called in for now.. As pressure increases to pay back the deficit it is likely that there will be more corporate failures going into 2011. As the economy improves there will be opportunities for investors to take advantage by buying up struggling companies to increase market share. For a list of struggling companies we have published our list of businesses facing winding-up petitions.

The UK’s retail sector faces another “bloodbath” on the high street next year, according to insolvency specialists. They point to decreased spending and rising unemployment as reasons to expect a wave of administrations echoing the events of early 2009.

In spite of improving sales figures and a boost in sentiment, 86 per cent of insolvency practitioners polled by industry body R3 believe this year’s drop in spending will prompt the collapse of more retailers after Christmas.

Another factor singled out for the predicted disappearance of over 20 household names is creditors “biding their time” until after the peak trading period before they call in loans. January’s VAT increase is a further cause of pessimism for retailers.

“While it would be comforting to think that the worst of the downturn is over, it’s worth remembering that insolvency peaks after a recession ends,” remarked R3 president Peter Sargent. “We urge retailers to seek advice early when there is a better chance of rescue, rather than desperately clinging on, hoping that Christmas will cure all ills.”

In the opening months of 2009, around 22 high-street retail staples went into administration, including Woolworths, music outlet Zavvi, childrenswear chain Adams and tea and coffee merchant Whittard of Chelsea. For up-to-date information on businesses for sale and in administration take a look at our news section.

–>Latest retail businesses for sale.

There has been a great deal of fuss in the press about the “pre-pack” administration process not giving a fair deal for the business’s creditors and accountancy firms benefiting in the form of high levels of fees. Despite many attempts by the industry to highlight the benefits of a “pre-pack administration”, it seems that the process is going to be looked at in detail by the Office of Fair Trading.

The investigation is aiming to look at fee levels and recovery rates, following concerns about what’s returned to creditors and how much the preservation of jobs in the insolvent business has cost. If the OFT finds against the larger accountants’ fee levels then it is likely there will be more work for the next tier of accountancy firms.

It looks as if the whole insolvency industry is going to have an interesting 2010. This is because business groups, such as the Forum of Private Business, have asked the OFT to delve into “phoenix companies” as well.

For those not familiar with the processes a “phoenix company” is simply a new company that has bought the assets of an insolvent company and carries on in the same trade as insolvent company, often with the same name and most, if not all, of the directors from the failed business.
Complaints against this process focus mainly around accusations that the assets of the failed company have been transferred out at below market price.

However, a “pre-pack” is a deal for the sale of an insolvent company’s business (and/or assets) which is put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business will usually have been worked out before the insolvency practitioner (IP) is formally appointed, and is then rapidly executed once the appointment is made.

The Office of Fair Trading’s senior director, Clive Maxwell, commented: ‘We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers. Efficient insolvency services are an important component of a modern market economy.’

A former Plessey electronics and semiconductor foundry has appointed administrators after sustaining losses.
MHS Electronics Limited was known as Zarlink up until a year ago, when the analogue chip company was sold for one Euro to the French company MHS Electronics.

“We have regrettably had to make 14 redundancies but we are working to secure a going concern sale of this established and highly skilled business,” said Simon Girling, joint administrator at BDO Stoy Haywood. “The contraction of the consumer electronics and technology industries, and the wider economic conditions, have all played a part in MHS Electronics UK Limited’s current difficulties”.

When MHS bought the business from Zarlink, the Canadian-based company incurred a $13 million loss on the sale of the business. MHS also received €2 million towards costs of restructuring.

Now that the Summer of gloom is in full swing, some business sectors are looking forward to a bumper Autumn!… Insolvency experts and turnaround specialists are gearing up for a surge in corporate debt problems which they expect will generate the biggest wave of company restructurings in decades. This could mean lots of fees. Lucky them!

Given the difficult credit conditions banks have largely held off calling in loans, focusing instead on dealing with write-offs from the subprime crisis. But any struggling business may soon hear the bank knocking on their door.

With the potential for a serious downturn questions are being asked as to whether European insolvency regimes are in a position to deal with the consequences. Especially since corporate structures are much more complex now than they were when the Enterprise Act 2002 was initially envisaged.

It is these aspects of the current system that prompted David Cameron to raise the issue at the CBI employers’ group recently.

The answer, he suggested, was to borrow some of the best aspects of the US Chapter 11 bankruptcy regime – to save such companies from liquidation. Of course, he doesn’t completely understand things as liquidation really means that there is no hope left for the business. I think going into administration is what he really meant!
He pointed out that many of the likely casualties would be “fundamentally sound” companies, he said, but they would not have the “breathing space” to restructure and keep their businesses alive.

His comments have sparked a fierce debate between supporters of the US approach and defenders of the English system, introduced in the Enterprise Act 2002. The Enterprise Act works if more than 75 per cent of the creditors agree and do a scheme or pre-packaged restructuring but in the abscence of full agreement problems can arise.

When it works well, it can be cheaper and faster than the adversarial Chapter 11 approach, which is under the direct control of the courts.

Advocates of change, however, argue that the 2002 regime has not been fully tested in the sort of market conditions now seen across the advanced economies. Some predict it will buckle when the pressure builds and that a more formal legal framework is needed to provide stability, predictability and efficiency.

To many in Europe, the US system is seen as one that protects inefficient companies by allowing them to offload their commitments under court protection and emerge as stronger competitors who can undermine more efficient businesses that have not been able to do the same. The most obvious example of this is in the airline industry where large US airlines have been allowed to go into chapter 11 when perhaps they should have really been left to wither.

In conclusion, it is paramount that any system works well. Chaotic attempts at restructuring large UK corporates could do untold damage to UK plc as a place to do business.