5,055 compulsory company liquidations in Q2 2009, but administrations fall 21% on previous quarter

The second three months of 2009 have seen 5,055 corporate insolvencies in England and Wales, an increase of 2.9% on the previous three months (4,914) and of nearly 40% (39.1%) on the corresponding quarter last year (3,635). Significantly, since they typically involve larger corporate entities as opposed to sole traders, the number of company administrations in Q2 2009 have risen by 9.5% to 1,027 on the same period last year (938), but compared to the previous quarter (Q1 2009), this represents a drop of 21% from 1,311, according to figures released today by the Insolvency Service and analysed by international law firm Freshfields Bruckhaus Deringer’s restructuring and insolvency practice.

Adam Gallagher, a restructuring and insolvency partner at Freshfields, said: ‘A large number of businesses are still receiving triage. While some get sticking plasters, increasingly businesses with bad balance sheets and intrinsic trading challenges find solutions out of reach and administration or liquidation difficult to avoid.’

He continues, ‘Viable businesses may be nursed past covenant test dates and become the subject of more lasting solutions, but the complexity of balance sheets continues to mean that there are no quick fixes.’

Adam notes that administrations, which typically involve larger corporate entities, have significantly tailed off on the previous quarter, down 21%. He says, ‘This may be the result of businesses receiving a cash boost through the Christmas and New Year sales which gave some retailers and others temporary health, but this doesn’t mean that we should expect the same fall off during the current quarter. Many of the businesses with critical liquidity problems will already have sought insolvency protection leaving others to limp on helped by the low interest rates.’

Furthermore, Adam remains cautious in regard to the insolvency situation through the autumn: ‘While the quarter on quarter figures do not represent great increases in corporate insolvencies an ‘L’ shaped recovery continues to be the most likely. Therefore, the autumn could yet result in more misery for those companies which, as a result of continuing poor performance, are unable to arrest and remedy a breach in their lender covenants.’

‘A business’ health is largely determined by its previous 12 months’ financial performance. As we move toward the autumn, the disappointing, but hardly disastrous quarters of 2008, will be replaced, for the purposes of going concern sign-offs and lender covenant tests, by the quarterly performances of 2009 which for many businesses proved dismal. The collection of more negative quarters not being offset by three month trading periods with better results will see more debt covenants being breached and increase the risk of insolvency,’ he said.

‘We have already seen businesses roll out a range of measures, such as redundancies, salary freezes and the renegotiation of supplier contracts, to reduce costs and try and cut their cloth in accordance with the economic times in which they are now operating. Those companies that are left standing but that are not yet out of the woods are focused on shoring up their often overly complex balance sheets.’

Adam added: ‘Balance sheet restructuring can be incredibly complex, involving all kinds of debt including senior, mezzanine, second lien, payments in kind, credit default swaps, high yield, quasi equity, equity - the list goes on. While complex restructuring deals of this nature are getting done, this should not detract from the notion of what a mammoth exercise it can be in a market where the lack of liquidity still remains a major issue’.

The highest number of administrations taking place over the past three months continued to affect the ‘real estate, renting and related business activities sector’ which recorded 348 administrations, an increase of 17% on the same quarter the pervious year but a drop of nearly 10% on the previous quarter.

The financial intermediation sector saw administrations (15) increase by 36% from 11. Wholesale and retail trade administrations dropped by 40% to 139; construction dropped by nearly 8% to 111, as did manufacturing, by 26% to 190. Transport, storage and communications saw a fall in administrations from 56 to 32.