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Why is insolvency falling in the UK?

Date Added: 25/11/2013  

Insolvency rates in the UK are falling, even though the financial climate remains tough.

Data shows insolvencies were down 13 per cent in the first half of the year, though former insolvency trade body president Steven Law has warned a rise in companies going bust is inevitable at some point in the near future.

Speaking to Accountancy Age, he said: "There are signs that other creditors [aside from banks], including the taxman, are becoming a little less patient. A greater number of ‘time to pay' proposals are being rejected by HM Revenues and Customs, and other creditors such as business landlords seem more willing than before to file winding up petitions in the courts."

The improvement in the quality of company debt advice is clearly one of the reasons why fewer firms are going out of business. There are now more solutions to financial issues and insolvency practitioners have the skills, knowledge and expertise to help business owners find a way out of trouble and to plot a path to a brighter future.

As well as this, there has been a rise in what are described as 'zombie' companies - which means those that are only able to pay the interest of their debt and do not reduce the total amount of money that they owe.

With creditors aware that they will not receive all of their money if these firms go under, they will often be content to take the interest in the hope that the zombie company can improve its financial situation in time, when the economic recovery has gathered pace.

However, for businesses based outside of London and the south-east of England, the recovery is still very slow. Although the government has hailed the return to growth this year and boasted that the economy has turned a corner, the fact is most companies outside of London have not noticed any tangible differences in recent months.

Lending is still virtually impossible to access off the high street and without financing it can be difficult for company bosses to find a way to grow their business, create jobs and boost the economy as a result.

There is a risk of a vicious circle developing, with firms unable to expand due to the lack of economic expansion, which in turn damages growth levels and makes it even tougher to grow.

Falling insolvency data does not mean that struggling companies are out of the woods just yet.

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