Rising interest rates should not affect record low in corporate insolvency rates, says industry

Out-Law News | 03 Nov 2014 | 10:48 am | 2 min. read

UK insolvency practitioners (IPs) do not expect the current low level of corporate insolvencies to change over the next 12 months, even if the Bank of England raises the base interest rate for the first time since 2009, according to research by Pinsent Masons, the law firm behind Out-Law.com.

Of the 140 people surveyed by the firm earlier this month, 79% said that they expected their workloads to remain at the current 10 year low or decrease even further in 2015. Despite the fact that 56% of those surveyed said that the current low interest rate was the most significant factor preventing insolvencies, they said that improving economic conditions would cancel out the effects of any rate rise next year as predicted by economists.

"The current continued low interest rate environment, and continued forbearance by the banks, has contributed to the lowest number of insolvencies for 15 years," said restructuring law expert Steven Cottee of Pinsent Masons. "Improving economic conditions are leading to even fewer insolvencies. With the predicted rise in interest rates pushed back yet again the insolvency industry is downbeat about work prospects."

"Professional practices, including in particular law firms, are still finding the economic climate very challenging. Prominent firms such as Cobbetts, Halliwells and Tods Murray have all fallen victim to the trading environment over the past few years," he said.

According to 40% of the surveyed insolvency professionals, the sector most likely to experience an increase in formal insolvencies next year was professional practice. An increase in insolvencies in the retail sector was predicted by 29% of respondents, health including care homes by 22% and the real estate sector by 9%.

Publication of the results of the survey, which took place at the recent Restructuring and Insolvency Conference, coincided with the publication of the Insolvency Service's latest quarterly update on individual and corporate insolvencies in England and Wales. Between July and September 2014, the company liquidation rate fell to 0.54% of all active companies; the lowest level since records began in 1894. The number of liquidations in England and Wales was 11.7% lower than over the same period in 2013, while administrations fell by 18.8%.

Pinsent Masons also asked survey respondents about proposed changes to pre-pack administrations, as recommended by accountant and anti red-tape advisor Teresa Graham in her government-commissioned review of the practice. The changes include the creation of a 'pre-pack pool' into which details of proposed sales of insolvent businesses to connected parties could be submitted for scrutiny by an independent third party before going ahead. However, 70% of those surveyed by Pinsent Masons thought that the proposed changes were unworkable.

"Pre-packs have always been a hot topic and it appears that, despite the Graham Report, the issue will not be going away soon and a large number within the insolvency profession are very sceptical about the workability of the key recommendations of the report," said Cottee. "While the industry has been asked to adopt these measures voluntarily, they could be faced with further government legislation if the measures fail to have the desired effect."

In a pre-pack sale, the business is marketed to a new buyer before a proposed insolvency procedure begins and is sold immediately afterwards, so that its value can be preserved. Although the practice can be used to save ultimately viable businesses and jobs it has attracted criticism from creditors, as unsecured creditors do not need to be given advanced notice of a pre-packaged sale.

The government has said that it will introduce legislation to increase the transparency of pre-pack sales and improve financial returns if the voluntary measures proposed by Graham are unsuccessful.