Fewer firms going bust this recession than in the nineties

Figures from insolvency trade body R3 suggest 2002 Enterprise Act is having an impact

Corporate liquidations have dropped 30 per cent in the past 10 years, according to insolvency trade body R3.

This is partly attributed to the 2002 Enterprise Act, which was introduced to encourage a business rescue culture during the economic trough of the 90s, R3 claims.

According to the figures, there were 16,886 company liquidations in England and Wales during 2011, almost 8,000 fewer than the peak in 1992, when a whopping 24,425 businesses went bust. This is despite the current recession being deeper and longer lasting than in previous decades.

Lee Manning, president of R3, said: “When the recession began in 2007/2008 there was widespread speculation that there would be a corporate ‘bloodbath’ and businesses would fail in record numbers, yet it is clear that these predictions never materialised. Many doubt now they ever will.”

He added: “In the past there was an ‘insolvency lag’, with liquidations rising three years after the end of the 80s recession, and two years after the 90s recession, as creditors felt able to improve on their returns. This has not happened this time, with the liquidation rate currently at 0.7 per cent against a peak of 2.6 per cent in 1993.”

Manning said this was due to a culture change, started with the 2002 Enterprise Act, which pushed for company rescue rather than liquidation and took the views of all creditors into account rather than the secured creditors (banks).

“The act introduced a streamlined administration procedure, with the principal aim to rescue the company rather than subjecting it to a breakup or liquidation process, thereby preserving jobs. The new regime promoted the rapid rescue of ailing businesses or even the restoration of the company itself through a CVA, which is being used more than ever this year.

“Businesses in the retail sector since the start of 2011 have emerged from administration with over half the jobs and stores intact on average and corporate insolvencies have not spiked. This is good for sustaining employment and also aids future growth in the economy. Saving a business is always more productive than closing it down and I believe the 10-year-old Enterprise Act has encouraged a greater rescue-and-recovery culture which will benefit the economy when it starts to pick up,” Manning concluded.