Responsible lending and borrowing required by Philip King, Chief Executive, ICM on 07-May-2013

Figures from the Insolvency Service that show a fall in both company and individual failures is no cause for early celebration, nor confirmation that the UK is on its way to recovery.

Philip King, Chief Executive of the Institute of Credit Management, warns that looks can be deceptive. "Reductions in company liquidations and insolvencies are always welcome and these latest statistics from the Insolvency Service (a decrease of 15% year on year for liquidations and a 27% reduction on other corporate insolvencies) appear to suggest an improving position, especially in the context of other indicators from purchasing managers, credit managers and the banks."

"But these figures do not include those businesses that simply shut up shop without entering the formal insolvency regime and where outstanding debts are too small or too few in number to be worth creditors taking action. They do not also include any indication of businesses on theverge of bankruptcy, the so-called 'zombie' companies that are just managing to cover the interest on debts, or those being kept artificially afloat perhaps due to the forbearance of the banks or Her Majesty’s Customs and Revenue through a Time to Pay arrangement. Such forbearance is vital when it nursescompanies back to health but that’s not always the case."

"When the economy improves, businesses will need more cash to see them through the recovery. Cashflow will come under severe pressure,driving even more of the most vulnerable companies to the brink."

The ICM also welcomes the fall in personal insolvencies (down by 12%) but again warns that this does not tell the whole story. "These figures exclude Debt Management Plans and other informal arrangements between lenders and borrowers," Philip says. "We see many examples of individuals whose monthly debt liabilities exceed their monthly incomes, and at some point this has to come to a head."

Philip says that responsible lending – and responsible borrowing – whether involving a business or an individual, will be key. "There is ever more reason for vigilance in supplying and lending," he concludes, "and the concept of 'affordability' is key."

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