SPI publishes 8th survey of company insolvency in the UK

United Kingdom

The SPI has recently published its 8th survey of company insolvency in the UK, which covers the period 1st July 1997 to 30th June 1998, and includes responses from those appointed as insolvency practitioners and - for the first time - those appointed to turnaround situations.

The SPI's view is that the results of the survey indicate a difficult year in which to achieve business rescue with fewer companies being preserved. Returns to creditors have increased but the price for that appears to have been lower levels of job preservation. Market loss is an important reason for company failure but the primary reasons were poor management and financial constraint.

Reasons for company failure
The primary reasons for failure were identified as management failure, finance (loss of long term finance or lack of working capital/cashflow) and loss of market. The results show an increase in management related failures (which include over-optimism in planning, erosion of margin, product obsolescence and other factors) but fewer failures as a result of loss of market. The effect of loss of market appears to have been compounded by the strength of the pound and the impact of the Asian crisis, particularly among small companies.

Characteristics of failed companies
Manufacturing and construction remain the sectors most affected by insolvency with the property, hotel and catering and finance sections continuing to suffer the least.

Of the insolvent companies surveyed, 63% had a turnover of less than £1 million while only 9% had a turnover of £5 million. Although these figures indicate that there were proportionately more insolvencies in smaller companies, the trend appears to be a reduction in insolvencies of companies with small turnover and an increase in those with higher turnover.

Source of instructions
Company directors initiated 57% of the insolvency appointments in the survey, while secured lenders instructed in 15.6% of cases and other creditors in 12.3% of cases.

Duration of insolvency projects
96% of respondents expected their insolvency projects to be completed within five years and 54% expected their cases to last between one and two years.

Insolvency procedures used
CVLs represented 71% of the reported insolvency procedures, an increase from 53% on the previous year. Of the remaining cases, 15% were administrative receiverships, 5% were compulsory liquidations, 3% CVAs and 3% administrations. The proportion of receiverships and CVAs have fallen and the vast majority (75% in respect of administrative receiverships and 93% of CVAs) were in respect of companies with less than £5 million turnover.

Turnaround activities
'Turnarounds' or 'intensive care' are procedures taken before formal insolvency processes are initiated and include cost reduction, debt restructuring (raising new equity/negotiating with banks), improved financial controls and asset reduction.

The survey sample comprised of only 76 cases but Companies employing such activities at an early stage appear to stand a much better chance of staying in business. Interestingly, the survey showed that the choice was generally initiated by the bank rather than by directors themselves.

Of the 36.8% of reported turnaround cases which failed, in only half was the respondent appointed in the subsequent formal insolvency. Another finding was that those insolvency practitioners engaged in turn around work were generally acquired to do so without appointing external advisers; only 10% had external advisers in place.

The success of turnaround techniques relies to a large degree on being able to ensure that creditors achieve greater returns than they might expect through more formal insolvency processes. The survey indicates that 91% of cases expect to achieve a 100% return to creditors.

The most frequently mentioned factors which presented obstacles to obtaining a non insolvency solution were inadequate management and insufficient security for additional lending. However, it is apparent that these problems are rarely so serious as to prevent a turnaround solution.

The survey found that, contrary to expectations, the main resistance to non-insolvency proposals came from unsecured creditors. In only 3% of cases did the Inland Revenue or Customs & Excise resist proposals to settle outside of an insolvency procedure. This was also the case for banks and other secured creditors.

The success of insolvency practitioners
The survey found that the success or preservation rate fell from 30% last year to 20% this year. The SPI defines a business rescue as company survival (17% of 'successes'), complete sale of the company on a going concern basis (44%) and sale as a partial going concern (38%).

CVAs shows the highest preservation rate at 63%. Receivership preservations have risen to 53% and administrations have fallen slightly to 41%. The preservation rate in liquidation procedures has remained at 10%.

The preservation rate is highest among those companies that tend to have a high asset base or a specific product or service to sell. Hotels and catering and manufacturing have the highest success rates but the property sector reported no business preservations in the survey sample.

Smaller companies have a much lower chance of survival - only 15% of companies with a turnover of less than £1 million were preserved. On the other hand about 50% of companies with turnover between £5 million and £15 million were preserved.

The overall proportion of jobs saved fell from 29% last year to 15.4% this year and this downwards trend is reflected in all insolvency procedures except CVAs.

However the survey shows a very significant improvement in returns to creditors. Overall returns to creditors have increased to 18p in the £ with CVAs achieving 42p and receiverships 37p and administrations achieving 32p. Creditors of large companies tended to receive much higher returns than those of small companies. The average percentage return to creditors was unsurprisingly highest for preferential creditors, 27% of whom could expect 100% return.