'Winter of discontent’ for retailers with continued rise in insolvency
03 Feb 2012
Figures published today by the Insolvency Service show that personal insolvencies reached 119,867 - an 11.3% decrease on 2010’s levels.
Corporate insolvencies and liquidations are nearly 4% up on 2010 (20,999) with the total number of businesses going bust standing at 21,828 for 2011.
High Street woes
Bev Budsworth, managing director of multi award-winning, The Debt Advisor, commented: “The doom and gloom on the High Street continues with an alarming number of retail chains resorting to administration to try to save their businesses.
“Since the tail end of last year, this winter of discontent has seen a number of major High Street brands including Barratts, La Senza, Blacks, Peacocks and Jane Norman go to the wall, closing over 1,000 stores with job losses totalling nearly 7,000.
“As consumers are hit with rising prices and lower wages, many of them are tightening their belts and minimising their spend. This, in turn, has a direct impact on retailers who were forced to slash prices and margins in a continued attempt to keep people spending.
“Unfortunately, things are only likely to get worse for businesses. As declining revenues leave many companies unable to trade on a cash positive basis even if they could get ‘debt forgiveness’ from their creditors, I think we’re likely to see far more liquidations in the coming months.”
Brink of recession
Bev’s comments come at a time when the UK economy is on the brink of recession with a 0.2% contraction in the last three months of 2011. Retail sales actually grew by 0.6% in December (2.6% higher than December 2010), but that still wasn’t enough to prevent a tranche of them entering the administration process last year.
Accountants, Ernst & Young, recently reported that 2011 saw 206 companies issue 278 profit warnings (88 of which were issued in the final quarter alone) which equated to a 70% increase in the fourth quarter of businesses warning that profits would be lower than expected.
Bev expects this trend to continue throughout 2012. She explained: “For businesses to survive, they need to scale back by cutting their overheads and trimming staff costs which can have significant impacts for businesses large and small with reduced resource and complex redundancy processes.”
However, Bev is more optimistic about the outlook for personal insolvencies which have shown a decline since the second quarter last year. She commented: “It’s great to see that bankruptcies are continuing to decline with figures nearly a third down on the same point last year. It’s also encouraging to see that Individual Voluntary Agreements (IVAs) are continuing to be utilised with numbers climbing steadily throughout the year.
“UK consumer debt declined by £9 billion to £207 billion in 2011 with UK personal debt declining by £1 billion. Personal insolvencies continue to head in the right direction but financial pressures are still huge for the average man on the street.”
According to national money education charity, Credit Action, the average household debt was just over £7,900 in December 2011, when mortgages are factored in; this figure rises to nearly £56,000 with every UK adult owing £29,547 or 122% of the average salary.
Every four minutes someone is declared insolvent or bankrupt and with inflation still over 4%, financial pressures are still as great as ever.
Potential recipe for disaster
Bev highlights the relationship between unemployment and repossession and warns about a potential issue in the mortgage market which could further impact on people in serious debt. She continued: “Unemployment and levels of repossessions are inextricably linked. The Council of Mortgage Lenders (CML) will next week confirm final numbers of repossessions in 2011 but are already expecting repossessions to rise to around 45,000 this year.
“This is bad news in itself but add to this the pressure from lenders to ‘wean’ borrowers off interest-only mortgages and you have a potential recipe for disaster tempered only by record-low interest rates.
“This is a growing problem. In one case we dealt with, a couple who were paying £700 per month to an IVA were suddenly hit by an increase of £1,000 to their mortgage payment when their lender insisted that they converted from an interest only to a repayment mortgage. This now means that their IVA could fail, meaning that they not only face bankruptcy, but also the prospect of losing their business and their home.
“I fully understand that where people can afford a repayment mortgage, they should be encouraged to do so but lenders need to be acutely aware of hardship cases when evaluating payment models and never force people into a position where they may lose their job and the roof over their head!”
Bev concluded: “Times are tough so we all need to pull together to help each other through for what could be a very challenging 12 months for both consumers and the businesses that employ them.”
The figures from the Insolvency Service consisted of 13,047 IVAs, an increase of 4.5% on the corresponding quarter in 2010, 8,626 bankruptcies, representing a decrease of 28.3% on the corresponding quarter of 2010 and 7,300 Debt Relief Orders (DROs), up 18.3% on the corresponding quarter in 2010.