Source: Insolvency Service and Companies House

The graph above graphically demonstrates the impact the current economic slowdown has had on corporate liquidations. In the twelve months ending Q2 2009, approximately 1 in 120 active companies (or 0.8%) went into liquidation, which is up slightly on the previous quarter when the figure was approximately 1 in 130.

There were 33,073 individual insolvencies in England and Wales in the second quarter of 2009. This was an increase of 27.4% on the same period a year ago.

The Debt Relief Order (‘DRO’) is a new individual insolvency procedure which came into force on 6 April 2009 and which provides an alternative route into personal insolvency for certain categories of over-indebted individuals, subject to some restrictions. Some of those who had a DRO approved in Q2 2009 would have been declared bankrupt had the DRO route not been an option, but it is not possible to quantify this proportion.

In the second quarter of 2009, 86% of bankruptcies were made on the petition of the debtor, similar to the previous quarter and slightly higher than throughout 2007 and 2008 as a whole.  The percentage of bankruptcy orders involving trading debts (self-employed bankruptcies) was 13.7% in the first quarter of 2009 (second quarter 2009 figures for trading-related bankruptcies are not yet available), which is an increase from 12.9% in the previous quarter.

Are the Banks to blame for the current economic crisis? Well according to the Forum of Private Business, yes. According to their recent survey of members, although a number (12% of respondents) report a slight improvement in bank support, the vast majority reported seeing no improvement and 18% said they were experiencing a decline. The average lending rate for overdrafts, at 6.6%, and the 6.4% rate for loans were both well above the 0.5% Bank of England base rate. Demands from Banks for additional personal security also continued. The survey found that an overwhelming 66% of respondents want to see more support from local bank managers who are less constrained by centralised rules.

The Bank of England’s latest ‘Trends in Lending’ report, published in July covered the period to May 2009, reported the net flow of lending to UK businesses remained negative in May with spreads and fees reported to have risen in recent months. The British Bankers Association reported at the end of July that lending to small businesses rose by £391 million in June, whilst almost 50,000 new small business relationships were established.

So where does this leave us? My experiences suggest that unfortunately the Banks facilitated the greed of the masses by being all too willing to lend to people all too willing to borrow, believing that they were invincible. The Banks are now finding it very difficult to lend to small businesses that have no tangible security and who are not able to show that the market is out there to support increased borrowing. The Banks are currently suffering huge write offs and are being expected to increase their own capital margins by the Central Bank. Not until there is a return of confidence and true belief that we are heading out of the recession will lending to small businesses become any easier.

Every businessman knows that if he is going to borrow money from a bank, either by way of overdraft or loan, the bank will insist on receiving a debenture to secure the money being advanced and will take a charge over some or all of the company's assets. Why does the bank do this?

The answer is simple, to improve its chances of recovering the debt from the company in the event of its collapse. As a debenture holder, the bank sits above unsecured creditors and shareholders and therefore when there are not enough funds to go around, the bank stands a much better chance of getting its money back.
If the banks know that by taking out a debenture they are in a more secure position, why is it that directors do not take out a debenture, secured over the company’s assets, when they introduce money into their own company by way of a director’s loan account? We believe the reason is they are not advised to do so.

Securing money advanced to a company by way of a debenture is a relatively simple process but it has to be done properly, otherwise the security is worthless. Very importantly, the debenture needs to be put in place before any money is introduced otherwise the advantage could be lost if the onset of insolvency occurs within two years of the debenture being taken out.

At Cranfield Business Recovery we are able to advise directors, thinking of introducing their own money into their company and how to improve the chances of recovering that money if things do not go according to plan. During these difficult financial times, it is more important than ever to protect funds being introduced and by the use of a debenture, this can be achieved.

The third round of the Cranfield Carting Challenge Cup took place at Prior Park, Tamworth in weather that we have come to expect this Summer, torrential rain. However, this did not dampen the spirits of the teams present and added to the excitement as we watched many serious off piste manouvers onto the grass and into tyre barriers.

The race was eventually won by Wallace Crooke & Co, Chartered Accountants and Business Advisors, followed very closely by Needham & James, Solicitors. The win takes Wallace Crooke & Co into the overall lead for the season as we await the final round back at Tamworth in September.

Following the success of our 2008 TechBite LIVE seminars, aimed at providing helpful hints and tips to professionals, we hope to resume the series in the Autumn.

For more information on our seminar topics please contact us or see our website for more details.

P.S. Don’t forget to check our fortnightly blog for all our latest news and events at www.cranfieldbusinessrecovery.co.uk/blog.