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Insolvencies rocket amid mounting misery for firms

SCOTTISH corporate insolvencies in the latest full quarter were up 70.6% on the same period of last year, official figures have revealed, and one leading expert predicted the number of failures could climb higher still.

The figures, published yesterday by the Accountant in Bankruptcy, signal misery for many firms which survived through the Great Recession and its immediate aftermath but have now reached the end of the road.

Nevertheless, experts pointed out that the leap in Scottish corporate insolvencies could be a sign of economic recovery, with improving conditions making it easier for banks to realise value from distressed companies' assets.

There were 244 corporate insolvencies in Scotland in the quarter to March 31, the AiB figures showed, up from 143 in the same period of last year. This year-on-year comparison strips out seasonal fluctuations.

The number of Scottish corporate insolvencies in the latest full quarter, comprising 181 compulsory liquidations, 62 creditors' voluntary liquidations, and one receivership, was up by 6.6% on the October to December 2013 period.

The figures do not include administrations.

The AiB observed that its corporate insolvency statistics showed a general upward trend between 2009/10 and the first quarter of 2012/13. This had been followed by a sharp decrease during the remainder of the 2012/13 financial year. It added that, more recently, there had been an upward trend in the financial year to March 2014.

Matt Henderson, head of business recovery and insolvency services at accountancy firm Johnston Carmichael, said of the latest quarterly figure: "On the corporate side, I think the (insolvency) numbers have been quite suppressed for a while. It is not so much this is an extraordinarily high number. It is just a release of some of the cases that have been held back over the last wee while."

He highlighted the pattern from previous recessions.

Mr Henderson said: "It is certainly true to say insolvency statistics are (highest) not at the depth of the recession but as we climb out of the recession. There are going to be more buyers around for distressed assets as confidence increases and people are looking around to buy assets. The market for distressed assets, whether as a going concern or on a break-up basis, improves maybe 18 months (to) two years after the bottom of the recession.

"In previous recessions, we have seen this pattern. We have seen insolvency numbers increasing not at the bottom but as we ascend from the bottom. It is generally to do with improved confidence in buying assets and a perception prices will increase."

He added: "That gives banks opportunity. Over the last couple of years, banks haven't really had an opportunity to realise distressed assets because of the lack of confidence and indeed the lack of funding for businesses or for assets. If you are seeing insolvency numbers increase, ironically it can be a sign of an improving economy. It is kind of counter-intuitive."

Mr Henderson saw potential for a further significant increase in the number of corporate insolvencies.

He believed allegations of mis-selling of interest-rate-hedging products could be preventing banks from putting some businesses into insolvency.

And he thought corporate insolvencies could rise as state-backed banks were returned fully to the private sector. He believed this transition could see such banks adopt an approach to outstanding debt based more on commercial, and less on public interest, grounds.

The UK taxpayer has big stakes in Royal Bank of Scotland and in Bank of Scotland owner Lloyds Banking Group.

Mulling the outlook for corporate insolvencies, Mr Henderson said: "I would say there is more to come. There are a few issues that are actually holding things back even now, even with the improving market conditions: things like the allegations of mis-selling of interest-rate-swap products. Banks are actually holding off taking any action against companies that may be in that situation because they have to resolve that issue.

"Clearly they don't want to put a company into administration, then be criticised for doing so...The banks are very conscious of public perception just now." He added: "One thing which might increase the (insolvency) numbers is, as the banks return to private ownership, their behaviour may become more commercial and they may not carry situations they are currently carrying as they go back to the private sector and are looking at things with less of the public interest at heart."

Bryan Jackson, business restructuring partner at accountancy firm BDO, said of the latest AiB figures: "I wouldn't have thought the numbers would be up as much as they were...I think people are getting rid of the zombie businesses to some extent: I think a combination of banks (and) creditors thinking, 'I have stuck with this for ages and ages'...

He added: "I think it is a volume of dead businesses. I would honestly guess a lot of these businesses have been in that state (for quite a long while), some of them way back to when the recession started...I think some of it is just timing, when a bank thinks, 'We have stuck with this for years. If if can't come up now, when it (the economy) is beginning to turn, it is never coming up."

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