Yvonne Brady: Insolvency is not the end of the road for firms or jobs

Published on Wednesday 28 July 2010 22:44

IN MOST people's minds, corporate liquidation is synonymous with failure. Recent figures revealing a record number of liquidations in Scotland painted a depressing picture of a beleaguered economy that has a long way to go before it finally bounces back from the battering it suffered in the global downturn.

While there is little doubt that the situation will get worse before it gets better (there is clearly no fast exit from this recession), with the attendant misery of further job losses, there are signs of some stabilisation in certain markets and light at the end of the tunnel.

There is a realisation that insolvency does not automatically mean the end of a business, rather the possibility to reshape and revive.

Firms are gearing up to enter acquisition mode. Borrowing is still not easy but companies with cash are already in the market looking for businesses which can survive the recession and be made ready for growth in an improving market, for example in the service sector and facilities management. When the recovery finally gathers pace, formal insolvency will provide a mechanism by which the good parts of failing businesses can be saved. Jobs will be safeguarded and operations that have real potential will benefit from targeted investment that will drive future profitability and growth.

There is no denying that the current figures on Scotland's economic performance are stark. Statistics published by the Accountant in Bankruptcy last week showed there were 304 corporate insolvencies between April and June, a 66 per cent increase on the same period last year and 8 per cent rise on the previous quarter. The number of firms going into liquidation has risen to a record high of 982 over the past year, almost 200 more than the previous highest figure, recorded in 2002.

These statistics mask the herculean efforts that are going on behind the scenes to keep businesses trading in Scotland by banks, administrators and specialists in corporate insolvency.

There has been much criticism of the banks. However, the vast majority of work being undertaken by and for them is with a view to retaining and maintaining businesses. Currently these efforts to save failing businesses account for a significant portion of their work with customers in financial distress.

There is clear strategy on the banks' part to work with businesses wherever possible, to get them through the difficult period of the recession.

With the best will in the world, this is not always possible. Despite the best efforts and often superhuman attempts to rescue failing businesses, not every casualty can be saved. Formal insolvencies, by and large, represent instances where there is insufficient underlying stability in the business to continue support.

And there is every prospect that corporate failures will increase. We have failed to come out of the recession as quickly as many had hoped.

Scotland only emerged from recession late in 2009 and the latest GDP figures were disappointing. The economy recorded zero growth between January and March this year and GDP fell by 3.5 per cent in the year to March, a more sizeable slump than the 3.3 per cent decline throughout the UK over the same period.

Nevertheless, there are some areas in which Scotland is outperforming the rest of the UK. Construction enjoyed a gain of 2.8 per cent on the previous quarter and financial services grew 2.5 per cent. While public administration, education and health fell by 0.1 per cent across the UK, it rose 0.9 per cent in Scotland.

The economy is recovering, albeit slowly, and when we do at last begin to get the traction we need, the expected increase in corporate failures will mask another altogether more positive development.

In many instances these will be via an administration, which is is intended to achieve the rescue of the business and its employees. While the number of failures may at first glance indicate a negative position in the market, the reconstruction and realignment that will take place because of them is likely in the longer term to produce positive results in industry and the economy.

The firms that survive will be stronger, fitter and leaner and better prepared to face the challenges of the next decade.

• Yvonne Brady is Head of Restructuring in Scotland, DLA Piper