Leap in Scottish corporate insolvencies

The number of corporate insolvencies in Scotland rose by 28 per cent during the first three months of this year compared with the final quarter of 2017 and rose by 67 per cent compared with Q4 2016-17 (January-March 2017), according to latest data.

“In many respects, this rise is not too surprising. Insolvencies of well-known companies have featured regularly on the newspaper front pages since the start of 2018, with further reports of firms scrambling to renegotiate rents and contracts with suppliers and landlords.

“It’s important to note that the AiB does not record administrations or Company Voluntary Arrangements, without which it’s hard to get an idea of the full picture in Scotland.

“R3’s members reported that a number of companies sought urgent advice in the wake of the Carillion liquidation, but it’s difficult to assess the extent of any potential ‘domino effect’ from Carillion’s insolvency on other companies. Any large insolvency can lead to further troubles in the supply chain; support from the financial sector, as we have seen in the Carillion case, can however help to soften the blow for counterparties, with repayment dates pushed back and loan facilities extended.

“Another key factor behind the rise in insolvencies could well have been the repeated bouts of severe weather which froze activity in our high streets, roads, and on construction sites. Festive trading was also not as strong as anticipated for many firms, and the prospect of the looming ‘quarter day’ rent payment due at the end of March may well have been the final straw for a number of firms.

“Many companies are facing a complex trading environment. Staff costs are rising; there are concerns about the availability of staff after the UK leaves the EU next year; new technologies promise a productivity boost, but investing in as-yet unproven assets and software can be risky. There is also the prospect of at least one interest rate rise later this year.

The figures reveal the number of personal insolvencies (bankruptcies and protected trust deeds) in Scotland fell by 7 per cent in Q4 2017-18 (January-March 2018) compared with Q3 2017-18 (October-December 2017), and fell by just 0.6 per cent compared with Q4 2016-17 (January-March 2017).

Mr Cooper said: “The latest statistics, showing a fall quarter-on-quarter in personal insolvencies in Scotland, are a slight deviation from the measured and steady rise we’ve seen since the end of 2015. Despite this latest decrease, we think there are still reasons for concern about the state of Scottish people’s finances.

“Between December and February there were 17,000 fewer people in work in Scotland, and a slight rise of 3,000 in the number of people who were unemployed and looking for work. The unemployment rate of 4.2 per cent is still low by historical standards, but in the era of insecure contracts and the gig economy, looking at unemployment alone to explain personal insolvency levels is not sufficient.

“People paid by the hour who were not able to get to work during the extended period of poor weather in the first quarter may have seen an impact on their finances. The increases in the National Living Wage and National Minimum Wage at the beginning of April should have improved many people’s immediate financial position, although in a number of cases any pay rise will have been offset by an increase in the default auto-enrolment pension contribution, from 1 per cent to 3 per cent of salary, which will have cut take-home pay.

“Although inflation has recently dipped, and is now by some measures lower than wage growth, providing relief for many, it’s important to remember that wage growth has been sluggish at best for some time now, and many people have responded by reducing their savings rate, or running down their savings in order to keep up with their outgoings. This has left large numbers of people without any form of financial cushion to cope with unexpected events.

“The Bank of England increased interest rates in November, to 0.5 per cent, and many forecasters believe that another rise, taking the base rate to 0.75 per cent, could be announced in the near future. With interest rates having been so low for so long, many people who came of age and became financially independent during the post-crisis period since 2008 will not have experience of increasing interest rates, with the knock-on effects on consumer credit availability and affordability, and could be in for a rude awakening.