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News - 29 April 2006

Business failures hit record high

The UK is experiencing its fastest growth in the number of limited businesses failing, according to the latest figures from Experian, the global information solutions company. In the first three months of 2006, corporate failures increased by 15.3% to 4,818 – the highest quarterly increase recorded since 1999.

Last week we reported record highs in personal bankruptcy or Individual Voluntary Arrangements (see story in Knowledgebase). The knock on effect of rising consumer debt and insolvency is inevitably business closures. Add to this the fact that the Government has been promoting funded support for new businesses start-ups but has not provided funding to ensure their continued survival. Many businesses have been set up simply to fail when the funding runs out.

There has also been an increase, for the first time since Q1 2002, in the number of companies going into compulsory liquidation. Compulsory liquidation is when the court makes an order for the company to be wound up (a 'winding-up order') on the petition of an appropriate person – the director(s) of the company or a creditor. Administration orders are also on the increase – up 55% on the same period last year. Companies going in to administration during 2005 include Golden Wonder Ltd and The Sock Shop.

Richard Lloyd, Managing Director of Experian’s Business Information division, commented, “This increase of 15.3% is alarming. In 2004, the UK recorded the lowest number of corporate failures since 1998, but insolvency rates have now been rising at an increasing rate since the last quarter of 2004. These latest insolvency figures really reflect current market conditions and illustrate some of the threats that businesses, especially in certain sectors, are experiencing.

“No region has bucked this trend. In fact, every UK region has seen an increase in the number of businesses failing, with all the fallout, including lost jobs, that entails.”

In total, 4,818 companies failed during the first quarter of 2006, compared with 4,180 in the first quarter of 2005. Voluntary liquidations increased by 3.9% over the same period, administration orders by 55%, compulsory liquidations by 26.5% and receiverships by 9.7%. Only voluntary arrangements fell, by 24.2%.

Of the 34 industries surveyed by Experian, 22 recorded an increase in business failures in the first quarter of 2006. Most noticeably, among the larger sectors, these included Building & Construction (up 17%), Information Technology (up 39%), Food Manufacturing (up 26%), Media (up 35%), Food Retailing (up 52%), Non-Food Retailing (up 48%), Business Services (up 33%), Property (up 85%) and Motor Traders (up 68%).

Most of those sectors which saw a decline in business failures already have very low failure levels, such as Building Materials (from 3 failures in the sector to just 2), Chemicals (9 to 6), Electricals (36 to 32) and Agriculture, Forestry & Fishing (20 to 14).

Business Services continued to record the highest number of failures – 965, compared with 724 in the first quarter of 2005 – representing an increase of 33%.

For the first time, corporate failure rose in all UK regions, with Wales recording the highest increase, up 65% (to 114). In East Anglia, business failures were up 54% (to 149), in the South West (up 34% to 278), Northern Ireland (up 35% to 27), North West (up 33% to 626), London (up 15% to 948), East Midlands (up 16% to 257), West Midlands (up 16% to 429), Scotland (up 9% to 197), North East (up 8% to 81), South East (up 7.2% to 980) and Yorkshire & the Humber (up 4% to 432).

Richard Lloyd concludes: “In order to safeguard their future, businesses need to be vigilant to the threat of insolvency and should ensure that best practice is followed when it comes to credit management. Carrying out regular checks on both new and existing customers can often make a real difference and can ensure that the risks of exposure to business failures and bad debt are significantly reduced.

“Following the sharp rise in corporate insolvencies in 2005, we predicted that the increase would continue into this year, and we see no reason for the insolvency rate to slow down this year. Rising insolvencies can have a knock-on effect of bringing down more businesses with them. As more companies go under, their suppliers are left with bad debts, which will, in some cases, tip the supplier over the edge, resulting in even more job losses.”

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