The headlines from the statistics released last week by the Insolvency Service focus on the record increase in personal insolvencies. There has been an increase of 24.9% on the same quarter last year and 2009 as a whole is 25.9% up on the previous year.

As far as corporate insolvencies are concerned there are marked differences across the different types of insolvency procedure. For liquidations there has been a 23% increase in cases on 2008 whilst the numbers for administrations, after eliminating anomolies, shows just a 1.7% increase for the year. By comparison to the changes on the same quarter last year liquidations have a 1% fall but administrations a drop of some 34%. A closer examination of the numbers show that across all forms of corporate insolvencies the numbers increased throughout 2009 with liquidations and administrations peaking in the second quarter of 2009. The notable exception was company voluntary arrangements, which are continuing to rise. The reduction in liquidations and administrations is likely to be as a result of the reticence of the banks and HMRC to initiate formal insolvency proceedings during this period with the latter promoting their Business Payment Support Service (so called 'time to pay' arrangements) . There is also a greater willingness to support CVAs to maximise the chance of recovery from creditors.

The key question is what is going to happen in the coming months? History dictates that now that we are technically out of recession we can expect the number of insolvencies to climb in the months ahead. Following the recession of the late eighties and early nineties, the level of liquidations did not peak until 1992. This time around the recession has hit harder and whilst I think there can be little doubt that corporate insolvencies will begin to climb again in the near future and will take a long time to fall back to pre-recession levels, the timescale and the level to which they will rise is more difficult to determine.

Peter Godfrey-Evans is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Peter you can call him on 01908 605552. 

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You may remember an earlier post Liquidation and bankruptcy petition dangers, where I highlighted a legal decision emphasising that a petition is not to be used to pressurise a debtor into paying one creditor.

Ruth has asked about how to deal with this situation in practice:

Can I get an emergency injunction to prevent a supplier who is abusing process petitioning for my bankruptcy over a disputed debt? I sent them a cheque with a letter stating it was in full and final settlement of the debt and the supplier banked the cheque. Now they are saying I still owe the balance and have taken out a bankruptcy petition. I don't want it to get publiciced or it will damage my reputation. Can I stop them with an injunction?

Unlike company winding-up petitions, bankruptcy petitions are not normally advertised, but what are your suggestions or observations? Please comment below.

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The number of companies facing insolvent liquidation rose by 15% during the second quarter of 2008, as compared to the same period last year, as the credit crunch continues to impact upon the UK economy.

Figures from The Insolvency Service published on 1 August 2008 revealed that there were 3,560 compulsory liquidations and creditors' voluntary liquidations (CVLs) in England and Wales during the second quarter of 2008. This was made up of 1,324 compulsory liquidations, an increase of 19.8% on the previous quarter, and 2,236 CVLs, an increase of 7.3%.

Further evidence of an economic slowdown was highlighted by 1,246 other corporate insolvencies, comprising 177 receiverships, 938 administrations and 131 company voluntary arrangements, an increase of 63% compared to the same period last year.

These numbers support the findings of a recent survey (July 2008) undertaken by R3, the trade body for insolvency practitioners, which showed that 90% of respondents believed that a rise in business insolvencies would hit the UK in 12 months’ time, indicating that the worse is still to come.

The Insolvency Service figures support this survey and highlight retail, construction, property, leisure and manufacturing among the worst affected sectors as consumers rein in spending in the face of rising inflation rates and a deteriorating property market.

Offering his reaction to the latest statistics, Steve Smith, Head of Insolvency at Mercer & Hole comments: “These are very worrying figures and do not bode well for the UK corporate sector - particularly for small to medium-sized businesses which suffer most in a downturn. Of particular note is the rise in compulsory liquidation numbers which suggests that creditors are now seeking to recover their debts more aggressively as other forms of recovery become less effective.” 

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The number of individuals becoming insolvent fell 8.3% to 24,553 in the second quarter, surprising analysts who expected to see an increase as evidence that higher living costs were impacting upon people's finances.

Individual insolvencies were made up of 15,297 bankruptcies (down 6% on the same quarter a year ago) and 9,256 Individual Voluntary Arrangements (IVAs) (down 12%). Interestingly there was a pronounced shift towards debtors' petitioning for their own bankruptcy as, in the second quarter of 2008, 84% of bankruptcy orders were made on a debtor’s petition.

Nevertheless, we must look at these statistics with an element of caution as they may have been skewed by a rise in the number of people entering into informal debt management plans to try and head off insolvency.

Indeed, the decline in individual insolvencies is generally perceived to be a result of a reduction in the number of people entering into IVAs as lenders are more reluctant to accept IVAs and are imposing stricter terms. This has been fuelled by reports over the past year of banks raising their hurdle rates - the amount of money they are willing to accept from borrowers to settle their debts.

Steve Smith, Head of Insolvency at Mercer & Hole, comments: “Although the 'trickle down' effect of the credit crunch hasn’t truly hit personal insolvency figures, over the next 12 months the situation seems certain to deteriorate as consumers in the UK rein in their lifestyle borrowings. The downturn in the housing market, soaring commodity prices and the credit crunch will continue to take their toll.”

 

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The High Court insists on payment of the bankruptcy debts and expenses being made in full before granting an annulment order, whereas in the county courts orders are often granted based upon undertakings to pay.

In the case of Halabi v London Borough of Camden and another Mrs Halabi applied for an annulment under section 282 of the Insolvency Act 1986 on the basis that the debts and expenses of the bankruptcy had been paid or secured. Her solicitor gave an undertaking to hold the funds in his client account until the annulment order was made by the court.

It was ruled that 'paid' in section 282(1)(b), taken together with rule 6.211(2) Insolvency Rules 1986, did not include the provision of security for a debt by way of undertaking. The wording of section 282 was clear that the bankruptcy debts and expenses had to have been actually paid, not just that the bankrupt's solicitor undertook to pay them. The court did however have the power to specify that an order for annulment should not take effect until a later date. If this method were used the operation of the order would be suspended until the conditions specified by the court were satisfied. It was ordered in this case that the annulment should not take effect until the Official Receiver had notified the court that the bankruptcy debts had been paid.

The ruling should have the effect of ensuring that in future annulments will not be granted until payment of the bankruptcy costs and expenses has been made in full, regardless of in which court they are heard. Debtors and their advisers should take note.

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Three interesting procedural points relating to the bankruptcy of individuals arose in Law Society v Dixit Shah [2007] EWHC 2841 (Ch), where recovery was sought from bankrupt solicitors' professional indemnity insurers.

1. Discharge of a bankrupt merely extinguishes a creditor's remedy of enforcement, not the underlying cause of action.
2. The court can accept or reject a proof of debt (under its general jurisdiction from Section 363 of the Insolvency Acy 1986) without the trustee having considered the matter first.
3. A proof may be admitted or rejected for reasons other than determining a right to vote or participate in a dividend, where the proof of debt procedure is directed to satisfying the claim of a legitimate creditor (here, through the Third Party (Rights against Insurers) Act 1930) without any possible harm to any other creditor.

Floyd J appeared determined to ensure that legal technicalities should not prevent the third party claimants being able to recover from the insurers. Read the judgment (link above) for more detail.

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You won't find a lot about personal insolvency on this blog, although I may visit the subject from time to time.

If you need help or advice relating to personal debt, I (for fairly obvious reasons) recommend relief4debt.co.uk.

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