View from City Road: Fewer green shoots for smaller firms
Wednesday 21 April 1993
The number of firms going into receivership has fallen for the past two quarters but the rate of liquidations and individual bankruptcies is still rising. The reason is that receivership, which is used only with medium-sized to large companies because of its expense, is rapid. Once a bank has decided to pull the plug, the appointment of a receiver is relatively instantaneous. Changes in the economic climate, particularly cuts in interest rates, feed back quickly into cuts in receivership rates.
By contrast liquidations tend to affect smaller companies and are far less responsive to changes in the economy as they usually follow months and even years of legal effort by creditors to obtain repayment by other means. Individual bankruptcies lag recovery for similar reasons.
Following the last recession of 1981-82, bankruptcies did not peak until 1984 and liquidations not until 1985, whereas receiverships started falling in 1983. On this basis, bankruptcies will only start levelling off next year at the earliest, while liquidations, already at record levels, will keep rising until the end of 1994.
The Society for Practitioners of Insolvency has produced further evidence (see graph) for believing small firms have borne the brunt.
The SPI wants changes in the Insolvency Act to cut both costs and legal red tape for small companies in trouble. It wants to provide firms with a period of protection from their creditors while they work out a repayment deal, called a Corporate Voluntary Arrangement.
With liquidations set to keep rising until spring 1995, the Government should consider this reform.
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