Personal and corporate insolvencies on the rise in Scotland

The latest statistics from Accountant in Bankruptcy (AiB) for the first quarter of 2018-19 show total personal insolvencies, which include both bankruptcies and protected trust deeds (PTDs), rose by 11.8 per cent relative to the first quarter of 2017-18.

Bankruptcy awards are down 6.5 per cent on the same period a year ago with 1,236 awarded for the first quarter of 2018-19, covering the period from 1 April to 30 June 2018. This figure is below the 1,322 awarded in the same quarter for 2017-18. There was a marked increase in PTDs, with 1,972 PTDs protected in the first quarter of 2018-19, up from 1,547 in the same quarter last year.

The Scottish Government’s pioneering Debt Arrangement Scheme (DAS), which allows people to take control of their finances and repay their debts without facing insolvency or further action being taken against them, also showed a rise of 8.5 per cent compared to the same quarter a year ago.

There were 648 debt payment programmes approved under DAS in the first quarter of 2018-19, compared with 597 in the same quarter for 2017-18.

A total of £9.5 million was repaid through the scheme in the quarter, similar to the £9.4 million the previous year.

Accountant in Bankruptcy chief executive Richard Dennis, said: “While the number of individuals entering insolvency continues to be very much lower than 10 years ago, these figures clearly illustrate personal insolvencies remain on an upward trend from the first quarter of 2015-16.

“With consumer borrowing now surpassing the levels seen before the 2008 crash, we are leading an ambitious programme of reform to make sure the debt solutions offered by the Scottish Government remain relevant in today’s society.

“In particular, changes expected to come into force this October will make the Debt Arrangement Scheme a much more accessible and flexible option for some people who otherwise may see no alternative other than insolvency.”

Tim Cooper of R3 in Scotland, the insolvency and restructuring trade body, said: “Scottish personal insolvency numbers have been fairly unpredictable from quarter to quarter – this is the fourth time in a row that a quarter-on-quarter rise has followed a quarter-on-quarter fall. The underlying trend line for the past two years, however, shows a rise in the number of personal insolvencies, and this latest set of figures continues this pattern.

“During the second quarter, there were rises in the cost of petrol and diesel, which will have eaten away at people’s budgets. Inflation across the UK was lower than at the start of the year, but consumers are still adjusting to the price rises experienced over the latter half of 2017.

“The impact of the new, higher rates of the National Minimum and Living Wages introduced in April will have helped many people to bear higher costs for essentials like food and fuel, although these latest personal insolvency numbers suggest that for many, it may not have been enough, especially following a long period when wage growth was outstripped by inflation.

“This increase in personal insolvency comes during a period of low unemployment in Scotland. The latest figures show a small rise in the number of people seeking work in Scotland, driven by more women looking for jobs. Overall, the headline unemployment rate of 4.3 per cent is roughly in line with the 4.2 per cent seen across the UK as a whole.

“R3’s most recent personal debt research suggests that a third of Scottish adults (33 per cent) often or sometimes struggle to payday, so money worries are not confined to a small number of people. As always, talking through any worries with a qualified and trustworthy advisor can be a real relief – we want to get the message across that help is out there, and taking that first step to speak to someone can be scary but is ultimately a good idea.”

Meanwhile, the number of Scottish corporate insolvencies rose during the quarter from the same period a year ago. There were 245 total corporate insolvencies during the quarter, up from the 200 recorded in the first quarter of 2017-18. This number was composed of three receiverships, 145 compulsory liquidations and 97 creditors’ voluntary liquidations.

Nevertheless, the 245 recorded during the first quarter of 2018-19 is down on the 259 reported in the previous quarter, Q4 of 2017-18.

Mr Cooper of R3 said: “The number of corporate insolvencies has fallen slightly in April-June 2018 compared with the previous quarter, but is notably larger than in the same quarter last year. The larger number of corporate insolvencies in January-March 2018 may have been boosted by directors deciding to wind up their businesses at the end of the financial year, while the bigger picture shows that corporate insolvencies have been trending upwards since the start of 2017.

“It’s been a tough first half for many Scottish companies, with only weak GDP growth of 0.2 per cent in the first quarter, and a big fall of construction sector output (-3.5 per cent). The statistics do not quite tell the whole story, however, as company voluntary arrangements and company administrations are not included.

“Every insolvency of a company will have a knock-on effect for other companies which were its suppliers, customers or creditors. Around 17 per cent of companies in Scotland may have suffered a financial hit following the insolvency of a customer, supplier or debtor in the last six months, according to R3’s research – this is however lower than the proportion of UK companies reporting a negative effect from the insolvency of a counterparty within the previous six months, which stands at over one in four (26 per cent).

“The picture isn’t all rosy for Scotland, though. The troubles in the retail sector in particular have been widely reported, with consequences for companies in other sectors, from shop outfitters to recruitment agencies supplying shopfloor staff. The Scottish Government launched a review of business rates in late June; based on its findings, there may be some relief for beleaguered high street names, which can’t come soon enough.

“Businesses as a whole are affected by a lack of consumer spending power, as inflation has eroded people’s take-home wages, leaving less for essentials and for extras. In addition, the background of rising staff costs, pensions auto-enrolment costs and the need to invest in technology and more efficient processes has not gone away.

“R3’s monthly research into levels of company distress consistently finds Scotland with the lowest proportion of companies considered at greater than normal risk of insolvency in the next twelve months of anywhere in the UK. However, the proportion of businesses falling into the negative band has risen from a fifth (22 per cent) in July 2017 to over a third (35 per cent) in July 2018, mirroring the trend for the UK overall (from 27 per cent to 42 per cent over the same period).

“It’s really important to emphasise that a period of distress will not inevitably lead to insolvency: for directors of struggling firms, seeking external guidance from a regulated, professional expert on restructuring and turnaround can be a pivotal experience. Don’t wait until it’s too late – getting advice and taking action before your business is overtaken by events is key.”