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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