Vol 8 (2011) - Issue 1

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Where Are All The Corporate Insolvencies?

Why is that following a recession as deep as that encountered in the years of Great Depression of the 1930s have we not seen an expediential rise in the rate of corporate insolvencies?

Currently there are many theories being put forward by economist as to why the economy has bounced back into growth following the credit crunch, global banking crisis and global recession. Importantly such theories provide forecasts to the future, with many saying that it was the severity of the fall that has made the bounce back so strong. Like a motorist who has had to slow down, he will pick up speed to 'catch up' on journey time, businesses will react in exactly the same way. However as the American management theorist, Laurence J Peter famously said 'an economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.'

Bearing this maxim in mind it is with some trepidation that as a mere lawyer I seek to explore why we have not seen the expected huge rise in corporate insolvencies and speculate on whether with the recession now over we can expect to see continuing falls in insolvency levels.

Perhaps the recession wasn’t that bad? An economic recession is officially identified by a fall in Gross Domestic Product (GDP) over two consecutive quarters. The decline in GDP over six quarters from Q2 2008 to Q3 2009 was more severe than any other recession suffered in the last seventy years. With the generally anticipated time lag between general economic decline and business failures being 12-18 months, it was predicted by many commentators, myself included, that 2010 would see a large rise in the numbers of corporate insolvencies. Instead we have seen in comparative period Q2 2009 and Q2 2010 a fall in liquidations of 19% and of administrations 24%.

While GDP is the accepted economic measure of growth or decline, it does not tell the whole story. Different economic indicators in other earlier recessions have been undoubtedly worse. For example in the 1980s unemployment rates and falls in household income were significantly worse, while in the early 1990s business insolvencies and repossession rates were higher. The has led some, David Cameron included, to question whether GDP is a realistic measure of success (and by implication failure) and that an individuals standard of living should be judged on wider measures, although more intangible such as employment and home security, health and even happiness.

So perhaps one could point to the fact that after the credit crunch and consequent global banking system crisis the recession was nowhere near as bad as feared. Has this inspired consumer and business confidence which in turn has avoided a recessionary spiral and ensured economic growth over the last four quarters (to Q3 2010)?

Unfortunately for the UK the answer does not look this simple. The economic recovery is immensely fragile with GDP growth averaging over the period of recovery a rise of 0.5% per quarter, retail spending is falling, the UK housing market moribund and consumer and business confidence remains resolutely low.

The banks are sitting on the problems?

Undoubtedly the severity of the credit crunch and the near implosion of the Western banking system following the collapse of Lehman Brothers has had a salutary effect upon legislatures and regulators around the world. Swift and massive State intervention into the banking system on an unprecedented scale prevented its collapse. This intervention has however come at a high cost, not least to the Banking industry itself. Now in some areas part State owned, all Banks will now be subject to stricter capital requirements and be more heavily internally and externally regulated. This will means that moves into lucrative (but risky) investment activities will be curtailed; it is no coincidence that the demand for collateralised debt obligations, a major source of credit funding pre-credit crunch, has all but disappeared. It will be naïve to assume that Bankers will not find innovative solutions and invent new forms of credit instruments but in the current climate such innovation is likely to be slower to develop.