Scottish corporate failures fall but concerns over offshore debt recovery tactics

The latest Accountant in Bankruptcy (AiB) figures show that there was a fall of 13.9 per cent in the number of companies failing between the third quarter of 2015 compared with the same quarter last year falling from 209 to 180. (please note that the AiB uses the financial year (April to March) as its base so although their current figure states Q2 this refers to July to September 2015 which we call Q3).

Pamela Muir, head of restructuring and insolvency with leading lawyers Morisons LLP, explained: “The fall in Scottish corporate insolvencies in the third quarter of 2015 is welcome and is to be expected given the benign lending environment. Many of the companies which were hovering on the brink of corporate failure have already gone and those which are left have adjusted to the new economic situation.”

“However, there should be a note of caution given the continued low interest rates which have contributed to a mood of unreal optimistic expectation. The truth is that interest rates have only one way to go and when they rise they will have an impact and businesses need to be prepared for this change rather than assume the world will continue as it has done since rates were set at 0.5 per cent in March 2009.”

She added: “The main areas of concern are obviously still the oil and gas sector and other related businesses in the Aberdeenshire area and beyond. In addition those businesses servicing the sector such as hospitality, property services and others are all experiencing a considerable and substantial decline and they must prepare accordingly for this to continue until the oil price finds its level. We may also see some fallout from the recent collapse of the steel industry. The closure of any major employer has a much wider impact on the wider community and economy in which it operates. “

“But there are further concerns given the recent CBI report which highlighted the worst export orders for Scottish manufacturers in over two decades. Continued uncertainty in the Eurozone, China’s decline in activity, and a wider marketplace which is still unsure which way the economy is going have all led to a feeling that things may not be getting better but could simply be standing still.”

MS Muir concluded: “However, of further concern for some Scottish companies is that their financing from some UK Banks has been sold on over the last 12-18 months, as part of the Banks’ process of ridding themselves of non-core or non-performing loan portfolios.

“The new owners of these loans are often based overseas and are not subject to many of the codes and guidelines which regulated the original Bank. Often, they apply much harsher payment recovery techniques with clients in a bid to be repaid early or to maximise their own recoveries. I would urge anyone whose loan has been sold to take advice quickly. These companies may imply they can do what they wish as they are based offshore but there are options for those in such a difficult situation.”

Addi Shamash, corporate restructuring partner at HBJ Gateley’s Aberdeen office, said: “The good news is that overall personal and corporate insolvencies are decreasing, as the economy recovers and both individuals and companies enjoy a wider range of options for dealing with financial distress. This is also likely enhanced by stricter lending controls, which are leading to more manageable debt levels.

“While it’s good to see a reduction in corporate insolvencies being filed this quarter (8.6%), more telling is how significantly the numbers are down on the same time last year (13.6%). This indicates broader economic recovery, meaning that businesses in distress have better access to restructuring options and are more likely to go on to a positive future. Added to this, the rise in alternative financing is also possibly contributing to this improvement, as businesses now have more options for flexible growth funding.

“Although not necessarily reflected in today’s figures, we need to be aware of the current downturn in the offshore oil and gas industry and how it will likely be reflected in future. The current downturn might lead to some companies, unfortunately, needing to close their doors. However, with increased options for non-insolvency debt relief or restructuring paths, we are unlikely to see a steep rise in insolvencies overall. The oil and gas sector in Scotland has survived downturns in the past and will come through this one as well. Hopefully, the increased options for companies in distress will mean that we will see significantly fewer casualties than we would have if this downturn had coincided with the wider recession.”