Insolvencies on the wane

Insolvencies are running at much lower levels compared with the bleak days of recession in the early 1990s – but for small businesses there is little cause for celebration.

Analysts point out that though fewer big companies are going to the wall, smaller groups are still failing in large numbers.

Michael Steiner, insolvency partner at law firm Denton Hall, said that small businesses often fall into the trap of overtrading when recession lifts. “Orders start to go up so companies borrow more to bring in extra stock and recruit more staff. But they soon they find they are overstretched at the bank or cannot pass on price rises to customers.”

A recent report from the British Chambers of Commerce, which reinforces Steiner's view, revealed that individual insolvencies are staying at levels well above those seen before the recession.

BCC deputy director general Ian Peters said: “More people have started their own business over the past few years, but the extreme competitive pressures under which small firms are operating is taking its toll.”

Another study, published by Barclays Bank, found the number of small business closures in the three months to June was 21 per cent higher than in the second quarter of last year.

Anthony Loring, head of insolvency at McKenna & Co said that as the economy improves, “so there is a tendency in some quarters for people to expand at a faster rate than their cash flow facilities allow”.

Despite the high number of small businesses going to the wall, the overall trend in insolvency is down compared with a few years ago and work for lawyers has declined. This is because medium-sized and large companies are on a more secure financial footing.

Andrew Wilkinson, insolvency partner at Clifford Chance said: “There is far less big corporate work around at the moment, although there are exceptions, such as the demise of Chamberlain Phipps (the

footwear company) which was one of our clients.”

Evidence that the overall numbers are coming down is provided by the latest data from accountancy firm KPMG. Its figures show that receiverships fell 25 per cent between the first and second quarters of 1996, with the largest fall recorded in the North West.

KPMG's head of corporate recovery, Mike Wheeler, said: “Banks are willing to support those management teams in whom they have confidence in their attempts to overcome cashflow problems. When the difficulty is of a more fundamental nature, receivership is often inevitable.”

According to KPMG's report, manufacturing at 30 per cent and construction at 21 per cent accounted for half of all receiverships. Retailing accounted for 12 per cent.