Description
A study into the economic significance of the insolvency, recovery and turnaround profession July 2008.
A study into
the economic
signi?cance of the
insolvency, recovery
and turnaround
profession
July 2008
Sponsored by:
of the
industry
the value
insolvency
Disclaimer
Whilst every effort has been made to ensure the accuracy of the
material in this document, neither centre for economics and business
research ltd nor the report’s authors will be liable for any loss or
damages incurred through the use of the report.
Authorship and acknowledgements
This report has been produced by cebr, an independent economics
and business research consultancy established in 1992.
Contributors to this report were Sarah Bloom?eld, Mark Pragnell
(project director), Jonathan Said, Neil Shah and John Ward.
This study has been commissioned by R3 – the United Kingdom’s
main trade association for insolvency and turnaround professionals,
representing over 97 per cent of Insolvency Practitioners.
Nevertheless, the views expressed herein are those of the authors
only and are based upon independent research by them.
Reports
The summary report outlines the research conducted and highlights
the key ?ndings. The full report examines, quanti?es and considers
the current and future economic signi?cance of the insolvency
industry and can be accessed at www.r3.org.uk.
London, July 2008
All rights reserved. Copyright © centre for economics and business research ltd. 2008.
of the
industry
the value
insolvency
Summary report .................................................................................................................................................. 1
1 Introduction and background ............................................................................................................. 7
1.1 De?nitions .......................................................................................................................................................... 8
1.2 Functions of the insolvency practitioner .............................................................................................................. 9
1.3 Research methods ........................................................................................................................................... 12
1.4 Structure of this report ...................................................................................................................................... 12
2 An overview of the industry ............................................................................................................... 13
2.1 Main legislative changes ................................................................................................................................... 14
2.2 Overall trends in insolvency............................................................................................................................... 14
2.3 Trends in corporate insolvency ......................................................................................................................... 15
2.4 Trends in personal insolvency ........................................................................................................................... 18
2.5 The size and structure of the industry ............................................................................................................... 19
2.6 The insolvency practitioners.............................................................................................................................. 24
3 The importance and impact of the insolvency industry ........................................................ 29
3.1 The direct impact of the insolvency sector ........................................................................................................ 30
3.2 The indirect contribution to the economy .......................................................................................................... 32
3.3 Saving businesses from insolvency and protecting employees.......................................................................... 33
3.4 Encouraging entrepreneurship and liquidity....................................................................................................... 35
4 Strengths and weaknesses of the United Kingdom’s insolvency industry ................... 39
4.1 The balance between creditor’s and debtor’s interests ...................................................................................... 40
4.2 The ef?ciency of the United Kingdom’s insolvency industry ............................................................................... 43
4.3 The regulation of the industry............................................................................................................................ 46
5 The future of the insolvency industry ............................................................................................ 49
5.1 The main drivers of growth in the insolvency industry........................................................................................ 50
5.2 Prospects for the economic contribution of the insolvency industry .................................................................. 51
5.3 Prospects for individual insolvencies ................................................................................................................. 52
5.4 Prospects for corporate failures ........................................................................................................................ 56
5.5 The long term challenge of globalisation ........................................................................................................... 57
5.6 Study key conclusions ...................................................................................................................................... 59
5.7 Areas for review and possible action ................................................................................................................. 59
6 Appendix: Explanatory notes ............................................................................................................ 61
6.1 Analysing the survey results .............................................................................................................................. 62
6.2 The number people employed by the insolvency industry ................................................................................. 63
6.3 Estimating the indirect contribution of the insolvency sector ............................................................................. 64
6.4 The number of jobs saved by the insolvency industry ....................................................................................... 64
6.5 Estimating the wider economic contribution of the insolvency industry using World Bank data ......................... 65
6.6 Forecasting individual and corporate insolvencies ............................................................................................. 67
6.7 Expert interviews .............................................................................................................................................. 70
6.8 Bibliography ..................................................................................................................................................... 71
6.9 Membership survey .......................................................................................................................................... 72
Contents
The value of the insolvency industry
1
Summary report
• employs 12,700 people directly, including 1,744 licensed
insolvency practitioners, in 714 ?rms
• makes a direct contribution to national GDP of £780
million annually — plus an extra £230 million indirect
contribution through employees’ spending and purchases
from suppliers
• provides assistance to businesses with a combined
turnover of £132 billion each year
• helps to save 910,000 jobs annually in businesses that
are suffering from solvency problems
• is ranked ninth out of 127 countries for speed with which
it deals with troubled businesses and tenth out of 175
countries for the amount it recovers for creditors
• plays a vital role in maintaining a business environment
in which creditors are willing to lend, entrepreneurship is
encouraged and the economy can ?ourish. Our research
demonstrates that jurisdictions, like the United Kingdom,
that treat creditors appropriately in times of business
dif?culties are the most likely to be prosperous in the
longer-term
• should review and potentially further develop its regulatory
structures to ensure the United Kingdom maintains
its favourable position in the international rankings
of jurisdictions, and can best bene?t from increasing
globalisation and international mobility of business
centre for economics and business research ltd have
conducted an independent study into the economic
signi?cance of the insolvency sector and its potential future
contribution to United Kingdom prosperity.
The value of the insolvency industry
2
What does the insolvency industry do?
Insolvency is the inability of an individual or entity to pay
its debts when they are due. The role of the insolvency
practitioner is to administer an insolvency outcome within
the legislation and to ensure a fair, ef?cient and quick
redistribution of assets. In doing this, the regime itself,
and the individual practitioners within it, need to strike an
appropriate long-term balance between the interests of
debtors and creditors.
An often overlooked part of the industry is its role in helping
businesses and individuals avoid insolvency in the ?rst
place, both through providing advice to individuals and
businesses as well as through instigating formal ‘rescue
procedures’. The importance of these additional roles is
revealed in some of the results of a survey of insolvency
practitioners undertaken for this report; 67 per cent of
insolvency practitioners’ organisations are involved
in restructuring or turnaround of companies.
Meanwhile, an insolvency practitioner, working on average
43 hours a week, will typically spend twenty hours (48
per cent of their working week) on formal insolvency
procedures and seven hours per week preventing
insolvency.
centre for economics and business research ltd have
conducted an independent study into the economic
signi?cance of the insolvency sector and its potential future
contribution to United Kingdom prosperity.
The report identi?es the direct contribution of the insolvency sector to the United Kingdom using conven-
tional measures such as employment and gross value added. However, the role and signi?cance of the
industry is signi?cantly underplayed by considering these narrow measures. Rather, the industry plays a
vital wider role in creating an environment that balances the interests of creditors and debtors so as to be
conducive to entrepreneurship and risk taking, as well as providing expertise and a service for businesses
and consumers facing ?nancial dif?culty. We assess the signi?cance of this wider role and quantify the
number of business and jobs saved by the industry.
In this context, we also look at the future of the industry, investigating its strengths, weaknesses, oppor-
tunities and threats. We identify how the sector will need to adapt to meet future challenges and how the
current regulatory framework may hinder the United Kingdom’s ability to remain among the top of interna-
tional competition.
The size and shape of the industry
The insolvency industry is centred around insolvency
practitioners, of which there are 1,744 in the United Kingdom.
A considerable network of staff is required to support these
insolvency practitioners. We estimate that, in total, the
industry accounts for approximately 12,700 jobs. This
includes insolvency practitioners, assistant solicitors and
accountants, administrative and reception staff.
The evidence we have collected points to a degree
of polarisation in the industry. Nearly a third of all
insolvency practitioners (30 per cent) reported insolvency
related turnover in their businesses in excess of £10 million
(although some of these insolvency practitioners will be
in the same business). At the same time, 27 per cent of
insolvency practitioners reported turnover of less than
£500,000. This polarisation is partly related to the business
in which insolvency practitioners operate and re?ects
overall trends in the wider business services sector. Within
accountancy ?rms, more than half of respondents (53 per
cent) reported insolvency related turnover over £10 million
while only ten per cent reported turnover of less than
£500,000. In contrast, only twelve per cent of insolvency
specialists and law ?rms reported insolvency related
turnover to be greater than £10 million and 54 per cent of
these ?rms reported turnover to be less than £500,000.
The value of the insolvency industry
3
Despite the polarisation, the work that insolvency
practices undertake is varied. Firms deal with a mixture of
personal and corporate insolvencies, with 84 per cent of
insolvency professionals’ ?rms involved in a mixture
of individual and business work. Only eleven per cent
of organisations are involved with just businesses and only
four per cent deal with just individuals.
Although the industry is represented in every region of
the United Kingdom and ?rms are spread relatively evenly
across the country, a disproportionately large number of
?rms have an of?ce in central London (49 per cent) and/
or the North West (39 per cent). Likewise, London, the
South East and the North West have the larger shares of
insolvency professionals.
Although 79 per cent of insolvency practitioners are male,
women are becoming a growing and signi?cant part
of the industry. Half of practitioners in the industry aged
less 35 years are female.
The direct contribution of the insolvency sector
The conventional measures of the economic contribution
made by a sector to the economy are measures of
employment and gross value added (GVA).
We estimate the direct employment in the industry to be
approximately 12,700 jobs, while its gross value added
is £780 million per annum, equivalent to ?ve per cent
of the entire accounting profession and 0.08 per cent
of the national economy. In addition, the insolvency
industry’s purchases from suppliers and spending by
its employees accounts for a further £417 million of
national output.
The indirect contribution of the
insolvency sector
Direct measures of the impact of the insolvency sector
underestimate its importance in contribution to national
prosperity. This is because they fail to account for
the ‘enabling’ role played by the industry. This role
includes creating an environment that is conducive for
entrepreneurship and appropriate risk taking, while
safe-guarding creditors (and providing expertise and a
service for businesses and consumers faced with ?nancial
dif?culty). We considered two ways to try and measure this
role.
The ?rst approach makes use of the survey results we
collected. This allows us to estimate the number of
businesses and jobs saved.
The companies put through formal proceedings had an
average of 25 employees before the process began and
eighteen employees when the process was completed;
so, on average, 72 per cent of the workforce was retained
(or ‘saved’) after formal insolvency. This equates to a
total number of jobs saved through formal insolvency
proceedings of 312,000 in 2006 in corporations alone.
0%
5%
10%
15%
20%
25%
C
e
n
t
r
a
l
L
o
n
d
o
n
O
u
t
e
r
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
?
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
?
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
Source: cebr survey of R3
members, 2007, with standard error
bars. The number of responses
from Northern Ireland was too low
for reliable estimates to be made
Region in which insolvency practitioner is based, share of insolvency practitioners, Great Britain, 2007
The value of the insolvency industry
4
A further 3,300 business were saved through rescue
procedures in 2006. Although fewer ?rms go through
rescue rather than formal proceedings, they are typically
bigger with an average of 220 employees in the company
before the rescue procedures begin. After the rescue has
been completed, on average 80 per cent of employees
remain employed. We estimate a total of 598,000
employees were saved through rescue procedures.
Considering rescue procedures, as well as formal
proceedings, we estimate the industry is responsible for
saving 910,000 jobs in businesses with a combined
turnover of £132 billion per annum in 2006.
Our second approach to assessing the wider economic
contribution of the insolvency sector uses statistical
analysis of internationally comparable data to identify the
relative importance of the insolvency regime among other
factors in determining the prosperity of a country.
The World Bank publish 39 objective and consistent
measures of ‘ease of doing business’ across 175
countries. Within these 39 measures, there are some
that are directly related to the insolvency sector and the
insolvency regime within a country (e.g. recovery rate when
a business fails), and some which are not related to the
insolvency sector (e.g. the dif?culty in hiring workers). The
purpose of our analysis was to understand which of the 39
measures of ‘ease of doing business’ were most strongly
linked with the prosperity of a country.
Of all 39 indicators reported on by the World Bank, the
recovery rate when a business is closed (i.e. the pence on
the pound recouped by creditors through the bankruptcy
or insolvency proceedings) is the most strongly correlated
to a country’s prosperity (measured as gross domestic
product per capita). The time it takes to close a business
is also strongly related. Likewise, the recovery rate and
speed of closure are also strongly correlated to rates of
investment in an economy, and overall rates of economic
growth. These ?ndings highlight the importance of the
insolvency regime in delivering a robust and vibrant
economy.
The United Kingdom’s insolvency regime performs well
on these measures against other jurisdictions. The United
Kingdom is ranked tenth out of 175 countries for the
amount recovered for creditors when a business is closed;
it is successful in recovering an average of 85 per cent of
assets when a business closes. It is ranked ninth quickest
in the time taken to close a business with the average time
taken being one year.
Rank Country Recovery rate (%) *
1 Japan 92.7
2 Singapore 91.3
3 Norway 91.1
4 Taiwan 89.5
5 Canada 89.3
6 Finland 89.1
7 Ireland 87.9
8 Belgium 86.4
9 Netherlands 86.3
10 United Kingdom 85.2
11 Korea 81.8
12 Australia 79.7
=12 Iceland 79.7
14 Hong Kong, China 78.9
15 Spain 77.6
16 United States 77.0
17 Sweden 75.7
18 Portugal 75.0
19 Austria 73.7
20 Denmark 70.5
28 Germany 53.1
32 France 48.0
49 Italy 29.7
Amount recovered when typical business is
closed, top twenty out of 127 countries plus
other key economies, 2007
Source: World Bank and cebr analysis, 2007
*Note: Recovery rates quoted are based on the outcome a speci?c
scenario developed and consistently applied by the World Bank. It is not
a measure of average recovery rates across each jurisdiction. Indeed, we
recognise that average recovery rates in the United Kingdom are much
lower than this speci?c example.
The value of the insolvency industry
5
Future trends
Looking to the future, the study provides model-based
predictions for both business and individual insolvencies.
The current so-called ‘credit crunch’ and widely-predicted
slowdown in the United Kingdom macroeconomy will put
upward pressure on both business failures and individual
insolvencies. However, the rapid growth in use of Individual
Voluntary Arrangements that has been seen in recent years
cannot be sustained inde?nitely.
In our base scenario of 1.8 per cent growth in the United
Kingdom economy in 2008 followed by 2.1 per cent in
2009 and 2.6 per cent in 2010, corporate insolvencies
rise moderately; reaching a high of 18,000 in 2010 from
14,600 in 2008. After the economy recovers, failures are
expected to come down to approximately 17,700 in 2012.
But relatively small changes in economic growth can have
an ampli?ed effect on corporate failures. If the economy
grows slower than our base scenario or has a period
of recession, one should expect much higher levels of
corporate insolvency.
Our scenario analysis suggests individual insolvencies
will remain above 100,000 a year after 2008. Individual
insolvencies are likely to reach between 120,000 and
140,000 by 2012.
Overall, respondents to our survey of R3 members expect
growth in the insolvency industry’s turnover to slow over
the next ?ve years compared to recent trends. On average,
turnover is expected to grow by sixteen per cent in the
next ?ve years in comparison to twenty per cent over the
last ?ve years.
Looking further ahead, globalisation provides signi?cant
opportunities and poses many threats to the United
Kingdom insolvency industry. With growth in international
trade and emerging economies, the number and
importance of multi-national companies is expanding.
Meanwhile, businesses are becomingly increasingly
footloose internationally. In this context, there is now
greater competition between jurisdictions to attract locating
and relocating businesses, as well as capital. In addition,
this is likely to move the focus of the insolvency industry
further towards turnaround rather than formal insolvency.
Areas for review and possible action
Although the thrust of our research has been to identify
and quantify the contribution made by the insolvency
industry to the United Kingdom economy, it has highlighted
areas that the industry and its regulators may need to
address if the future contribution and growth prospects of
the industry are to be maximized.
There are ?ve areas that we recommend that
industry should review further and, potentially, identify
improvements to be made:
1. Improving the responsiveness of the regulatory
regime is an area for consideration. The questionnaire
responses indicated a stark contrast of views between
the ability of the industry to respond to a changing
regulatory environment and the speed at which regulators
adapt to a change in the regulatory environment. Four
out of ten insolvency professionals (41 per cent) selected
the speed at which regulators can adapt to a changing
environment as a weakness, eight per cent selected it as
a strength. In contrast, 57 per cent reported the ability
of the industry to adapt to a changing environment as a
strength, only ?ve per cent selected it as a weakness.
A signi?cant factor behind the speed in which regulators
can adapt is coordinating the efforts of multiple parallel
regulators. Our survey of insolvency practitioners revealed
that having multiple regulators is their biggest concern:
68 per cent of respondents selected having eight
regulators plus The Insolvency Service as a weakness of
the sector; only one per cent selected it as a strength.
Expert interviews revealed that a lack of resource means
it is dif?cult to implement changes quickly.
2. The consistency of the industry was highlighted as
a weakness. The survey respondents identi?ed that
a lack of consistency within the industry represented
a key weakness: 31 per cent of respondents felt the
industry lacked consistency, nineteen per cent selected
it as a strength. Many of the industry experts that we
interviewed suggested that, although the regulation
was consistent, and there was much communication
across regulators, the structure of regulators can give the
impression that that the industry lacks consistency.
Consistent outcomes are more likely to be achieved by
a greater commitment to co-operative working from the
different regulators. For example, other industries where
there has been concern regarding regulatory overlap have
attempted to respond to these concerns by developing
‘concordats’ and ‘memoranda of understanding’.
The value of the insolvency industry
6
3. Many of the experts we interviewed felt that the multiple
roles of The Insolvency Service led to possible
con?icts of interest. Our survey of insolvency practitioners
revealed that almost half the industry (42 per cent)
thought the multiple roles was a weakness. Just ?ve
per cent selected it as a strength. Industry experts cited
several problems, including:
• being a licenser and also regulating other licensees
leads to problems with transparency as it is not clear
who regulates The Insolvency Service
• dealing with cases themselves may affect The
Insolvency Service’s incentives. Although some felt
there was a role for the industry in dealing with some
cases that are not suitable for some insolvency
practitioners – for instance when there has been
illegalities – interviewees thought that there should be
a clearer line as to what was within The Insolvency
Service’s jurisdiction and what was not
• there was concern that the insolvency practitioners
licensed by The Insolvency Service were not
monitored fully
4. The cost of insolvency was highlighted as a relative
weakness of the United Kingdom’s regime in our
international comparative analysis, our interviews with
industry experts and in the responses to our internet
survey of R3 members.
It is relatively costly to close a business in the United
Kingdom compared to other international jurisdictions – the
United Kingdom was ranked 22nd with the average cost
estimated to be six per cent of the value of the estate.
Meanwhile, our survey of insolvency professionals revealed
that 23 per cent of insolvency professionals thought the
cost of the procedures was a weakness of the industry,
while only eight per cent selected it as a strength.
Three important points of clari?cation need to be made
regarding this issue. First, the cost of closing a business
is not the same as insolvency practitioners’ fees. Rather,
this represents just one element in the cost of closing
the business which also includes court costs, fees of
independent assessors, lawyers and accountants.
Second, the analysis of the World Bank data suggested
that the cost of closing a business was less important in
promoting economic activity and growth than a number
of other aspects of the insolvency industry i.e. the
amount recovered when a business is closed and the
time taken to close a business – all of which the United
Kingdom performs well on. Third, the apparent higher
costs in the United Kingdom might be re?ective of the
good performance the industry provides in other more
important respects — such as speed and recovery rates.
Nonetheless, the analysis does suggest that the cost of
business closure is worthy of further investigation. The ?rst
stage of any such action would be to identify the relative
importance of different aspects of the cost of closing a
business and how these compare with jurisdictions where
costs appear to be lower. This will help identify the extent
to which costs in the United Kingdom are ‘industry’ costs
or, for instance, costs (inappropriately) incurred by the legal
and regulatory framework. Action could then be targeted
at the areas where costs appear high by international
standards.
5. Liability was an issue raised during our research.
The report identi?ed how the insolvency industry is
already polarised and, in particular, the growth of large
insolvency ?rms. These trends will only be enhanced
by the further impacts of globalisation on the industry.
In an environment in which insolvency advice and
support is being administered by ?rms with in excess
of ?ve thousand people, regulatory framework which is
focused on individual insolvency practitioners may no
longer be ?t for purpose.
The value of the insolvency industry
7
This report examines, quanti?es and considers the current
and future economic signi?cance of the insolvency industry
— in terms of its direct contribution to employment and
national income, its indirect impact through its spending on
suppliers and other so-called ‘multiplier’ effects, and its role in
supporting entrepreneurship and appropriate risk taking.
1 Introduction and background
This report has been produced by centre for economics and
business research ltd (cebr), an independent economics
research consultancy founded in 1992. The study has been
commissioned by the Association of Business Recovery
Professionals (known as ‘R3’), the leading professional
association for insolvency, business recovery and turnaround
specialists in the United Kingdom. Nevertheless, the views
expressed herein are those of the authors only and are based
upon independent research by them.
In this introductory chapter, we ?rst explain terminology that
will be used throughout the report. Second, we describe the
statutory and non-statutory duties of the insolvency industry.
In the third section we explain our research methods. The ?nal
section outlines the structure of the report.
The value of the insolvency industry
8
1.1 De?nitions
In this section we explain terminology that will be used
throughout the report.
‘Insolvency’ is the inability, for whatever reason, of an
individual or entity to pay their debts when due. Legislation
governs what happens when an individual or entity
becomes insolvent; the law differs between corporations
and individuals. Legislation for individuals covers the self-
employed as well as other people; corporate insolvency
law relates to separate legal entities other than individuals
e.g. companies. In this report, we make a further
distinction between ‘business’ insolvency, which includes
both self-employed businesspeople and corporations, and
‘personal’ insolvency, which relate to those individuals who
are not self-employed.
An ‘insolvency practitioner’ is a licensed professional who
is authorised under statute to administer the insolvent
estates of a company or an individual. An insolvency
practitioner can ful?l the roles of an administrative receiver,
a receiver, a liquidator, an administrator, a supervisor of
a corporate voluntary arrangement or a special manager
of a company or the role of a trustee in bankruptcy or the
supervisor of an individual voluntary arrangement for an
individual.
1
The ‘insolvency industry’ comprises of insolvency
practitioners, and their associated support and
administrative staff.
A ‘receiver’
2
is a person that is appointed as a custodian of
an individual’s or corporation’s property by a court of law or
a creditor of the owner, pending a lawsuit or bankruptcy.
A ‘liquidator’
3
is a licensed insolvency practitioner
appointed either by the members, in the case of a
members’ voluntary winding up, or the directors and
creditors, in the case of a creditors’ voluntary winding up,
or by the Court in the case of a compulsory winding up to
administer the estate and distribute the assets after paying
the expenses to the creditors or members as appropriate.
An ‘administrator’
4
is a licensed insolvency practitioner
appointed by the court under an administration order (see
section 1.2) or by the holder of a valid ?oating charge or
by the company or its directors ?ling the requisite notice at
court.
1 Source: R3
2 Philip, Ken, and Kerin Kaminski. ‘Receivership: A Value-Adding Tool’ Secured
Lender, January/February 2007, Vol. 63 Issue 1, pages 30-34,36.
3 Source: R3
4 The Insolvency Service, insolvency terms, 2007
An ‘administrative receiver’
5
is a licensed insolvency
practitioner who is appointed by the holder of a valid ?oating
charge to realise the assets charged for the bene?t of the
debenture holder after meeting the costs and the claims of
the preferential creditors.
A ‘supervisor’
4
is a licensed insolvency practitioner
appointed to supervise the carrying out of a company
voluntary arrangement or an individual voluntary
arrangement.
A ‘trustee’
6
in the insolvency context is the trustee of
a bankrupt’s estate who is authorised under statute to
administer the bankrupt’s estate for the bene?t of his or her
creditors after paying the costs of such administration. The
trustee is usually a member of the Of?cial Receiver’s of?ce
— although, in complicated cases, it is usually a licensed
insolvency practitioner.
‘Discharge from bankruptcy’
7
brings an end to the
restrictions of bankruptcy and releases the bankrupt from
the debts owed at the date the bankruptcy order was made
(with certain exceptions).
A ‘bankruptcy restrictions order’
8
extends the imposition
of bankruptcy on individuals for the period speci?ed in
the order of between two and ?fteen years. An of?cial
receiver can apply to court for a bankruptcy restrictions
order if they believe there has been dishonest, reckless or
culpable behaviour from the bankrupt. It does not affect the
discharge of the debts.
A ‘?xed charge’
9
holder has a charge held over speci?c
assets. The debtor cannot sell the assets without the
consent of the secured creditor or repaying the amount
secured by the charge.
A ‘?oating charge’
10
is held over general assets of a
company. The assets may change (such as stock) and the
company can use the assets without the consent of the
secured creditor until the charge ‘crystallises’ (becomes
?xed). Crystallisation occurs on the appointment of a
receiver, on the presentation of a winding-up petition or as
otherwise provided for in the document creating the charge.
5 Source: R3
6 Source: R3
7 Source: R3
8 The Insolvency Service, freedom of information, ‘technical manual’ Chapter 13,
part 12.
9 The Insolvency Service, Glossary of insolvency terms, 2007
10 The Insolvency Service, Glossary of insolvency terms, 2007
The value of the insolvency industry
9
1.2 Functions of the insolvency practitioner
In this section we discuss the functions of the insolvency
practitioner
11
. First we consider the options that an
insolvency practitioner may administer to a corporation in
?nancial dif?culty. Second, we consider the options for an
individual in ?nancial dif?culty. The majority of these options
require a licensed insolvency practitioner. With a few
options, a practitioner is not necessary by law but is still
likely to be involved in the proceedings. When this is the
case, it is explicitly stated.
Considering the options for a company in ?nancial dif?culty,
one option is ‘liquidation’. There are three types of
liquidation that an insolvency practitioner may administer.
For each of these options a registered insolvency
practitioner is required, by law, to manage the procedure:
a ‘members’ voluntary liquidation’ (or ‘members’ •
voluntary winding up’) is when the shareholders of a
company decide to put it into liquidation, and there are
enough assets to pay all the debts of the company, i.e.
the company is solvent
a ‘creditors’ voluntary liquidation’ is when the •
shareholders of a company decide to put the company
into liquidation, but there are not enough assets to pay
all the creditors, i.e. the company is insolvent
a ‘compulsory liquidation’ is when a court makes an •
order for the company to be wound up (a ‘winding-up
order’) on the petition of an appropriate person, such
as a director or shareholder. Our survey of insolvency
professionals revealed that 88 per cent of their ?rms are
involved in compulsory liquidation
Many insolvent corporations can be saved from liquidation;
there are four possibilities for a company in ?nancial
dif?culty other than liquidation.
First, ‘administration’ is a procedure designed to rescue
companies in ?nancial dif?culty. Once an administration
order has been made by a court, creditors are prevented
from taking predatory action against the company, except
with leave of the court, and the company gains a breathing
space to sort out its affairs. The prime purpose under the
Enterprise Act is to rescue the company but that purpose
is hardly ever invoked. It is usually a better realisation of
the assets than would be the case in a winding up. An
administration can also be used to set up a company
voluntary arrangement. The procedure is managed by a
licensed insolvency practitioner.
11 Information from this section is taken form a variety of sources, such as The
Insolvency Service, R3, The Insolvency Act 1986, The Enterprise Act 2002
Second, ‘administrative receivership’ is when an insolvency
practitioner is appointed as a receiver by a debenture holder
who holds a valid ?oating charge or, more usually, a valid
?xed and ?oating charge over the assets of the company.
The company must be in breach of the terms of its
debenture for the charge-holder to trigger the appointment
and the administrative receiver will seek to realise the assets
charged for the bene?t of the debenture holder after meeting
the costs and the claims of the preferential creditors. That
could be by trading on and selling as a going concern or
rarely, closing the business down and selling the assets on a
piecemeal basis. It is a rarely used tool now and was much
more prevalent ?fteen to twenty years ago.
Our survey of insolvency professionals revealed that 74
per cent of their ?rms are involved in administration and/or
administrative receivership.
Third, a ‘company voluntary arrangement’ (often abbreviated
to ‘CVA’) is a formal arrangement between debtors and
creditors. The arrangement can take any form subject to the
agreement of creditors but normally involves the delayed
or reduced payment of debt, capital restructuring or an
orderly disposal of assets within an agreed timescale. The
company remains under the control of the directors but an
insolvency practitioner supervises the arrangement and pays
the creditors in line with the accepted proposals. The CVA is
often used instead of liquidation as a means of distributing
funds on the conclusion of an administration. For a CVA
to be binding on all the company’s creditors, over 75 per
cent by value of those creditors entitled to vote must vote
in favour of the proposals. This hurdle is one of the reasons
why an administration order is put in place ?rst before
seeking a CVA as the order, once granted, is binding on all
creditors.
Fourth, an ‘informal arrangement’ is where the company
writes to all its creditors to see if a mutually acceptable
agreement can be reached. The agreement is not legally
binding therefore neither party has to honour the agreement.
This could be a disadvantage for the debtor as they are not
protected from creditors pursuing repayment through formal
proceedings at a later date. A disadvantage for creditors
is that they may not have con?dence that repayments will
be made. In addition, the terms of the agreement are not
necessary equitable to all creditors – some may receive
higher undisclosed returns. The advantage of this option
is that the agreement is likely to be less costly than formal
proceedings. An insolvency practitioner is not necessary,
although they would be able to offer advice on the option.
Our survey of insolvency professionals revealed that 62 per
cent of ?rms are involved in advice for businesses and/or
?nance, accounting and legal services.
The value of the insolvency industry
10
An insolvency practitioner will calculate the amount a debtor
can afford to pay and organises a formal arrangement
between the debtor and the creditors. An IVA proposal must
be accepted by in excess of 75 per cent
13
of the creditors
(by value of credit provided). Creditors may receive a higher
return than they would through bankruptcy, although they
will receive less than full repayment of debts as interest
is often frozen and a proportion of the debt is likely to be
written off. An IVA may also allow more time for debtors
to pay off their debts. If repayments under the IVA are not
maintained, the debtor can become bankrupt. Our survey
of insolvency professionals revealed that 85 per cent of their
?rms are involved in individual voluntary arrangements.
There are also currently plans to introduce simple individual
voluntary arrangements
14
(commonly abbreviated to
‘SIVAs’). Current proposals state that SIVA cases would
typically be used by debtors in regular employment who,
after reasonable living expenses, had suf?cient disposable
income (or assets) to enable a dividend to be paid to
creditors in excess of that which would be achieved in
bankruptcy. It is likely a SIVA would only be available for
individuals with debt of no more than £75,000.
13 IVA advisor, IVA: what is a creditors meeting, 2006
14 The Insolvency Service, Improving voluntary arrangements, 2005
The ‘restructuring and turnaround services offered by
insolvency practitioners are often overlooked. Although not
part of the statutory functions of an insolvency practitioner,
our survey revealed that 67 per cent of their ?rms are
involved in restructuring and turnaround.
The results of our survey on processes insolvency
practitioners’ ?rms are involved in is given in Table 1. This
table also makes a distinction between accountancy based
?rms and insolvency specialist ?rms.
Table 1 Processes insolvency practitioners’
organisations are involved in, share of
professional’s ?rms, United Kingdom, 2007
12
Overall
12
Accountancy ?rm Insolvency specialist ?rm
Company Voluntary Arrangement / Members’
Voluntary Liquidation
92% 100% 87%
Compulsory Liquidation 88% 97% 83%
Business Administration/ Administrative
Receivership
74% 88% 61%
Restructuring and turnaround 67% 83% 48%
Finance/ accounting/ legal matters/ advice for
businesses
62% 88% 30%
Number of respondents 109 58 46
Source: cebr survey of R3 members, 2007
We now turn to options for individuals in ?nancial dif?culty.
If an individual becomes insolvent, they may claim
‘bankruptcy’ or take out an ‘individual voluntary
arrangement’.
An individual may be forced into bankruptcy by a
creditor or opt for bankruptcy themselves. A ‘Trustee in
Bankruptcy’ is appointed, which is either an insolvency
practitioner or a civil servant (an ‘Of?cial Receiver’). The
trustee’s role is to realise the assets in the bankrupt’s
estate and distribute the proceeds among the creditors.
The trustee will remain in control of the debtors assets until
the bankrupt is discharged, which is usually after one year.
The equivalent of bankruptcy in Scotland is sequestation.
Our survey of insolvency professionals revealed that 89 per
cent of their ?rms are involved in individual bankruptcy.
An individual voluntary arrangement (commonly known
by its abbreviation ‘IVA’) is an alternative to bankruptcy. It
allows individuals to avoid certain constraining penalties
that come with bankruptcy, for example the individual may
retain more assets than they would through bankruptcy.
12 Includes law ?rms and ?rms which classi?ed themselves as ‘other’, the number
of responses from these ?rms was too low for separate analysis of these types
of ?rms
The value of the insolvency industry
11
with statutory debt relief also prepare debt management
plans. This can be seen in Table 2. This suggests a
current emphasis for insolvency practitioners on statutory
procedures.
The survey results also reveal that 65 per cent of insolvency
professionals’ ?rms are involved in general advice on
?nancial and/or legal matters of individuals. The role of
the industry in helping individuals avoid insolvency is often
overlooked.
A ?nal option for a creditor (but of limited value where
the debtor is in serious ?nancial dif?culty) is a ‘county
court judgement’. If one or more creditors obtain a court
judgment against a debtor, a county court may make an
administration order. This is a court-based procedure
whereby the debtor makes regular payments to the court to
pay towards the debt. The court will take a small percentage
from the money paid towards its costs. If not paid regularly,
the order could be cancelled and the debtor may become
subject to the same restrictions as someone who is
bankrupt. This process is dealt with by the courts and an
insolvency practitioner is not necessary.
Individual processes that ?rms are involved in are not
signi?cantly different when comparing accountancy ?rms
and insolvency ?rms. However, there is some evidence
that insolvency specialists are more involved in individual
voluntary arrangements. More than nine out of ten (96 per
cent) of insolvency specialist ?rms are involved in individual
voluntary arrangements, compared to 93 per cent of
accountancy ?rms. The accountancy ?rms are likely to have
more involvement in bankruptcy, with 95 per cent of ?rms
involved in this procedure. Out of the insolvency specialists,
89 per cent are involved in personal bankruptcy.
Table 2 Processes insolvency practitioners’
organisations are involved in, share of
practitioner’s ?rms, United Kingdom, 2007
In Scotland, the process that is largely equivalent to an
IVA is a ‘protected deed trust’. The main difference with a
deed trust is that creditors cannot negotiate the proposal
the insolvency practitioner draws up. This can save time
and money but can also be less ?exible than an IVA.
If proposals are rejected, the individual is put through
sequestration.
We now discuss the non-statutory proceedings an
insolvency practitioner may use to aid an individual in
?nancial dif?culty.
For an over indebted individual, there are further options
that an insolvency practitioner may help to organise
that are not formal insolvency procedures. The most
frequently used option is a ‘debt management plan’ (often
abbreviated to ‘DMP’). This is similar to an individual
voluntary arrangement as it involves a compromise
between the debtor and creditors, but it is not legally
binding. As it is not a statutory form of debt relief, an
insolvency practitioner is not needed legally to negotiate
between the creditors and debtor.
The main disadvantages to debtors are that DMPs are not
binding on the creditors, they offer no certain compromise
on the debt level and they can be open ended in terms
of when full repayment might be made. The advantage
for a debtor is that they carry no stigma whereas both
bankruptcy and, to a lesser extent, IVAs do. If the debtor
fails to make repayments, they are likely to need an IVA
or a bankruptcy order. A creditor may prefer a DMP to
statutory forms of debt relief because the debt is not seen
as a bad debt and does not have to be written off in their
accounts, plus they are cheaper to set up and administer.
According to our survey of insolvency professionals, twenty
per cent of respondent’s organisations that deal
Overall Accountancy ?rm Insolvency
specialist ?rm
Individual bankruptcy 89% 95% 89%
Individual Voluntary Agreements 85% 83% 96%
Debt management plans 20% 19% 22%
General advice on ?nancial and/or legal matters for individuals 65% 72% 59%
Number of respondents 109 58 46
Source: cebr survey of R3 members, 2007
The value of the insolvency industry
12
The survey was issued on 19 September 2007 and closed on
15 October 2007. During that time period we received 169
responses: 109 were insolvency practitioners; nineteen were
turnaround professionals; ?fteen were a student member and/
or in training; 23 were none of the above but worked in the
insolvency industry; while three were retired or inactive in the
insolvency industry and were not asked any further questions.
More details of our survey analysis are in section 6.1. The
survey responses are in section 6.9.
1.4. Structure of this report
In this section we outline the structure of this report.
In the next chapter, we consider the structure of the industry,
how it has developed over time and the people who work
within it.
In the third chapter, we quantify the economic bene?ts of the
insolvency industry. First, we identify the direct contribution
of the insolvency sector to the United Kingdom using
conventional measures such as employment and gross
value added. Second, we quantify the indirect contribution
through its employees’ spend and acquiring inputs from
other industries. Third, we look at how the industry uses its
expertise to save businesses and their employees. Fourth, we
investigate how the industry creates an environment that is
conducive to entrepreneurship and appropriate risk taking.
The ?fth chapter considers the future of the insolvency
sector. We ?rst discuss the main drivers of the insolvency
industry. Second, we consider the prospects for the economic
contribution of the insolvency industry. Third, we analyse the
prospects for individual insolvency. Fourth, the prospects for
corporate insolvency are examined in more detail. In the ?fth
section, we consider the long term challenge of globalisation.
The chapter concludes with suggested areas of action.
The sixth chapter contains the explanatory notes and technical
methodologies. We provide nine notes:
Analysing the survey results •
Determining the employment in the insolvency •
industryMeasuring the indirect economic contribution of the
insolvency industry
Calculating the number of jobs saved by the industry •
Analysing the wider economic contribution of the insolvency •
industry
Forecasting individual and corporate insolvencies •
The industry experts we interviewed •
Bibliography of literature used in the compiling of this report •
The survey of the insolvency professionals and their •
responses
1.3 Research methods
In this section we discuss the research methods
15
we used
to investigate the insolvency industry.
This report is based on a thorough programme of research
by cebr including a literature review, quantitative analysis of
of?cial data, interviews with industry experts and a survey
of insolvency professionals. We consider these research
methods in turn.
We undertook a literature review to assess existing
evidence of how the insolvency industry supports the
United Kingdom economy and to assist our overall
development of research methods. A bibliography can be
found in Section 6.1.
We interviewed seven industry experts
16
. Experts were
from both the private and public sectors. We interviewed
regulators, insolvency practitioners and a representative
from the insolvency practices’ council. We discussed the
following topics:
What is the ‘insolvency industry’? •
The bene?ts and weaknesses of the United Kingdom’s •
insolvency industry
How the sector has developed over time and is •
expected to develop
Opportunities that will allow this to happen •
Risks that may prevent this from happening •
A quantitative analysis of of?cial data is used to estimate
the direct and indirect contribution of the insolvency
industry on the United Kingdom economy, to compare
insolvency regimes internationally and forecast future
trends. A more detailed explanation of the methods we
employed is in Section 6.1.
We also undertook an internet survey of members of R3.
This was to determine, with the assistance of of?cial data:
the size of the industry in terms of employment and •
turnover
details of people who work in the industry, including the •
hours they work, the work they do, remuneration
the region in which insolvency professionals, and their •
organisation, are based
the industry’s growth and expected growth •
opportunities and threats to the growth of the insolvency •
industry
strengths and weaknesses of the industry •
15 More detailed methodologies are in Chapter 6
16 A list of the experts interviewed is in section 6.7
The value of the insolvency industry
13
2 An overview of the industry
In this chapter, we consider the structure of the industry, how
it has developed over time and the people who work within it.
The key ?ndings are:
1. The number of corporate failures has been relatively stable
since 1996, although there has been a shift towards the
rescue of companies rather than liquidation. This can partly
be explained by legislative changes, which encouraged
administration. There is evidence that this was part of a
pre-existing trend
2. The number of individual insolvencies began to rise sharply
in 2004 and this cannot be explained by broader trends
in the macroeconomy alone. The majority of the growth
was through increasing numbers of individual voluntary
arrangements and more personal bankruptcies, rather
than insolvencies of self employed businessmen. The
three main drivers were: The Enterprise Act; heightened
awareness of insolvency options; and increasing consumer
debt
3. The insolvency industry is centred on 1,744 insolvency
practitioners, which are based in 714 ?rms. In total, the
industry accounts for approximately 12,700 jobs. This
includes insolvency practitioners, assistant solicitors and
accountants, administrative and reception staff
4. The insolvency industry has presence across the United
Kingdom, although there is a high share of practitioners in
London, the South East and the North West
5. The average insolvency practitioner is 46 years old, male
and is a head of department or manager; 75 per cent
of practitioners have quali?cations to A-levels equivalent
standard or above, and 57 per cent have a university
degree. The insolvency practitioner works an average of 42
hours a week and earns £110,000 a year. In addition, 72
per cent earn some form of additional bene?ts; 39 per cent
receive a bonus
6. Women are becoming a growing and signi?cant part of the
industry; 47 per cent of people under 35 years old in the
industry are female
The value of the insolvency industry
14
Third, it changed the entry routes into administration
19
.
Under the original administration regime introduced by the
Insolvency Act 1986, administration commenced only with
the making of a court order. The Enterprise Act made it
possible for an administrator to be appointed without a court
order. The aim of which was to eliminate the need for, and
costs associated with, a court application and hearing. In
addition, ?oating charge-holders, a company or its directors
became entitled to appoint an administrator without seeking
a court order, subject to certain restrictions
20
. In addition, the
2002 act introduced other measures to reduce the use of
court time in insolvency cases.
Fourth, it restricted the right of holders of ?oating
charges created after 15 September 2003 to appoint an
administrative receiver. This was aimed at encouraging
administration rather than receivership. In a receivership,
the insolvency practitioner has primary responsibility to the
creditor that appointed him. Administration, on the other
hand, is a collective procedure with more equal treatment of
creditors.
2.2 Overall trends in insolvency
In this section, we discuss the trends in insolvency. This is
to understand the main drivers of the industry and how the
industry’s environment has changed over time.
Overall, the economic cycle is the main driver of the
number of insolvencies. Figure 1 shows how the number
of insolvencies has changed since 1989. It contains
the number of individual insolvencies (bankruptcies and
individual voluntary arrangements), all corporate failures and
annual real growth in national gross domestic product. In
this graph, we take corporate failures to include: compulsory
liquidations; creditors’ voluntary liquidations; administrative
receiverships; administration orders; and company voluntary
arrangements.
19 The Insolvency Service, Enterprise Act 2002 – corporate insolvency provisions:
Evaluation report, 2008 and Frisby, S, ‘Report of insolvency outcomes’, 2006
20 Restrictions include: In the case of a company or its directors, the company is
or is likely to become unable to pay its debts. A ?oating charge-holder seeking
to appoint an administrator must give appropriate notice to the holder of a prior
?oating charge unless they have consented to the appointment. Similarly, a
company or its directors are required to provide a ?oating charge-holder with
prescribed notice.
In this chapter, we examine the environment in which the
insolvency industry is based. We consider the businesses
and the employees working in the insolvency industry.
We ?rst discuss the main legislative changes to the
insolvency industry. This is to aid understanding of our
second topic – the overall trends in insolvency. In the third
section, we discuss corporate insolvency trends in more
detail. In the fourth section, we discuss trends in personal
insolvency in more detail. Fifth, we examine the size and
structure of the industry, discussing turnover and growth of
the insolvency industry. In the ?nal section we examine the
insolvency practitioners themselves.
2.1 Main legislative changes
In this section we discuss the main legislative changes
to the laws that govern insolvency, and therefore have a
signi?cant impact on the insolvency industry. Since The
Insolvency Act 1986, there has been one main legislative
change: and The Enterprise Act 2002.
The main legislative change in The Insolvency Act
1986 was the introduction of new rescue procedures:
company voluntary arrangements and administrations for
corporations, and individual voluntary arrangements for
individuals.
Implemented in 2004, The Enterprise Act 2002
incorporated four main changes.
First, The Enterprise Act reduced the automatic discharge
period
17
for a bankrupt to twelve months from three years.
The repayment period was left unchanged at three years.
This was intended to reduce the stigma of bankruptcy,
whilst not reducing creditors’ returns.
Second, the new legislation established bankruptcy
restriction orders
18
with the aim of further discouraging
culpable insolvents and making the process for dealing
with them more ef?cient. Previously, if insolvency
practitioners felt there had been misconduct, the only
option was to prosecute. With bankruptcy restriction
orders, a prosecution is not necessary and an insolvent
can be put under certain restrictions for a period between
two and ?fteen years.
17 De?nition in section 1.1
18 De?nition in section 1.1
The value of the insolvency industry
15
2.3 Trends in corporate insolvency
In this section, we examine trends in corporate failure.
The number of corporate failures has been relatively stable
since 1996. Within this time period, there was some growth
of business failures during the dot-com crash, as can be
seen in Figure 2. The number of failures rose to 19,800
in 2002 from 17,300 in 2000. This was followed by a fall
in failures as the economy recovered; failures fell back to
17,400 in 2003.
We now look at the trends in the different types of corporate
failures. The number of each type of failure is given in Figure
2 and each type of failure as a share of total failures is given
in Table 3. There are six types of business failure examined:
Creditors’ voluntary liquidations •
Compulsory liquidations •
Receivership appointments •
Administrator appointments •
In administration •
Company voluntary arrangements •
Figure 2: Number of corporate failures
21
, England
and Wales, thousands
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
21 Administration may lead to liquidations; as such there is a possibility of an
element of double counting in these ?gures. Therefore the rise in business failures
in 2005 and 2006 that is due to companies in administration should be viewed
with care.
Figure 1: Number of insolvencies, thousand
(England and Wales) and real GDP growth,
annual percentage change, (United Kingdom)
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007 and Of?ce of National Statistics, 2007
As Figure 1 illustrates, a change in the
number of insolvencies tends to follow
a turn in the economy after a period of
approximately one year. The lag occurs
because it takes time for businesses and
individuals to use up existing resources and
for ?nancial dif?culty to become insolvency.
The recession in the early 1990s caused a
large increase in insolvencies. As economic
growth recovered in 1994 the number of
insolvencies moderated. After 1995 there
was a period of economic stability and
the number of insolvencies remained at a
modest level until 2002. However in 2003,
although the economy remained robust
and corporate failures low, the number of
personal insolvencies began to increase
rapidly.
We now discuss trends in corporate and
individual insolvencies in turn.
0
10
20
30
40
50
60
70
80
90
100
110
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
-2%
-1%
0%
1%
2%
3%
4%
5%
Total company failures (left scale) Personal insolvencies (left scale)
Real GDP growth (right scale)
Recession
and
r ecover y
Stable economic
gr owth
A fter
2002
0
5
10
15
20
25
30
35
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
Creditors'
Voluntary Liquidations Compulsory Liquidations
Receivership Appointments In
Administration (Enterprise Act 2002)
Company Voluntary Arrangements Administrator Appointments
The value of the insolvency industry
16
Table 3 Share of total business failures,
percentage, England and Wales
Year Creditors
Voluntary
Liquidations
Compulsory
Liquidations
Receivership
Appointments
Administrations Company Voluntary
Arrangements
1989 59.8% 37.3% 0.0% 1.3% 0.4%
1990 58.4% 38.5% 0.0% 1.4% 0.4%
1991 44.6% 27.7% 25.9% 0.7% 0.5%
1992 44.0% 29.2% 25.5% 0.5% 0.2%
1993 47.2% 31.2% 20.3% 0.4% 0.5%
1994 47.8% 31.1% 18.3% 0.8% 1.2%
1995 48.8% 29.9% 17.5% 0.9% 2.0%
1996 49.2% 29.8% 15.9% 1.2% 2.7%
1997 50.9% 30.6% 11.9% 1.3% 4.1%
1998 49.7% 32.5% 10.7% 2.1% 2.9%
1999 52.6% 30.2% 9.4% 2.6% 2.8%
2000 54.1% 28.4% 9.2% 2.5% 3.2%
2001 54.5% 24.8% 10.1% 3.7% 3.2%
2002 50.9% 31.5% 7.8% 3.3% 3.3%
2003 51.4% 30.1% 7.2% 4.3% 4.2%
2004 49.9% 30.0% 5.7% 10.5% 3.9%
2005 46.8% 32.0% 3.6% 13.8% 3.7%
2006 43.3% 30.4% 3.3% 20.0% 3.0%
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
Growth in the number of creditors’ voluntary liquidations,
compulsory liquidations and receivership appointments
have all followed the main trend in overall insolvencies, as
seen in Figure 3. In contrast, the numbers of administrator
appointments, companies in administration and company
voluntary arrangements, taken together, have been on a
general upwards trend. This can be seen in Figure 4.
Creditors’ voluntary liquidations make up the largest share
of corporate failures, contributing 51 per cent in 1997. Its
share rose to 55 per cent in 2001 but has since dropped to
43 per cent by 2006. The share of compulsory liquidations
has remained between 29 per cent and 33 per cent of
total failures over the period, although it dropped slightly
to 25 per cent in 2001. The number of company voluntary
arrangements as a share of all corporate failures has been
stable throughout the period 1998 to 2006, remaining
between three per cent and four per cent.
The number of receivership appointments grew at a much
faster pace during the recession and fell sharply after 1992.
As share of business failures, receivership appointments
fell from 10.1 per cent in 2001 to 3.3 per cent in 2006.
During this time the Enterprise Act 2002 was introduced.
However, there was already a declining trend. This may
have been because creditors turned to rescue rather than
receivership in the pursuit for higher returns.
The number of administrations has risen sharply as
the Enterprise Act made changes to the administration
process with effect from 15 September 2003 and provided
new entry routes. Since its implementation the number of
businesses in administration has grown robustly, to twenty
per cent in 2006 from under four per cent in 2002.
Overall, there has been a shift towards the rescue of
companies rather than liquidation. This can partly be
explained by legislative changes, which encouraged
administration. Additionally, there is evidence that this
was part of a pre-existing trend. Experts we interviewed
suggested that this was because creditors themselves saw
the bene?ts of rescuing a corporation earlier – giving them
a higher rate of return – and therefore pushed for rescue
rather than liquidation.
The value of the insolvency industry
17
Figure 3: Number of business failures, England
and Wales, thousands
Figure 4: Number of business failures
22
, England
and Wales, thousands
22 Administration may lead to liquidations; as such there is a possibility of an
element of double counting in these ?gures. Therefore the rise in business
failures in 2005 and 2006 that is due to administrations should be viewed with
care.
0
2
4
6
8
10
12
14
16
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
Creditors' Voluntary Liquidations Compulsory Liquidations Receivership Appoint ments
Source: Insolvency
Service, Statistical
release: insolvencies in
the third quarter 2007,
November 2007
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
Administration Company Voluntary Arrangements
Source: Insolvency
Service, Statistical
release: insolvencies in
the third quarter 2007,
November 2007
The value of the insolvency industry
18
An important change that has occurred since 2003 is the
type of person in ?nancial dif?culty. Much of the legislation
on bankruptcies and IVAs was devised with the needs of
the self-employed businessman in mind. However, ‘other
individuals’, namely consumers, have become the main
users. We have de?ned insolvencies of ‘other individuals’
as personal insolvencies. The number of self-employed
persons becoming bankrupt has remained fairly stable since
1998. Meanwhile the number of personal insolvencies has
risen strongly. This can be seen in Figure 6.
Figure 6: Number bankruptcies by type of debtor,
thousands, England and Wales and unsecured
credit, percentage of disposable income, United
Kingdom, 1989-2006
Source: Insolvency Service and parliament publications, 2007
The number of bankruptcies has more than trebled between
1998 and 2006. The number of self-employed individuals
that have become bankrupt has remained between 8,800
and 10,900 per annum. In 1998 the majority (53 per cent)
of individual bankruptcies was people classi?ed as self-
employed; this fell to seventeen per cent in 2006.
2.4 Trends in personal insolvency
We now consider the trends in individual insolvency and
the type of person becoming insolvent.
Total individual insolvencies comprise bankruptcy orders
and individual voluntary arrangements (IVAs).
Until 2003 the number of individual insolvencies grew at
a relatively subdued pace. The shares of bankruptcies
and IVAs over this period remained stable. During this
period IVAs contributed between twenty to 27 per cent of
individual insolvencies.
The number of individual insolvencies began to rise sharply
in 2004, by 31 per cent, as seen in Figure 5. The total
number of insolvencies increased from 46,700 in 2004 to
107,000 in 2006.
Figure 5: Number personal insolvencies,
England and Wales, thousands, 1983-2006
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007 and cebr analysis, 2007
Part of the rise in individual insolvencies can be explained
by the implementation of The Enterprise Act 2002 as it
reduced the stigma of insolvency. However, insolvencies
began to rise at a faster rate before the implementation
of the act. The sharp rise in personal insolvencies cannot
be explained by broader trends in the macroeconomy: as
Figure 1 shows, the economy grew consistently around its
long term trend of 2 ¼ to 2 ½ per cent per annum through
this period.
To understand the reason behind the rise in individual
insolvencies we examine the type of insolvencies that
occurred. In particular, we examine how the type of person
becoming bankrupt has changed and the rise in individual
voluntary arrangements.
0
20
40
60
80
100
120
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
Bankruptcy Orders Individual Voluntary Arrangements
Enterprise Act
0
10
20
30
40
50
60
70
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
0%
5%
10%
15%
20%
25%
30%
Personal bankruptcies (Left scale)
Self-employed bankruptcies (Left scale)
Unsecured credit as a share of disposible income (Right scale)
The value of the insolvency industry
19
2.5 The size and structure of the industry
We now consider the overall structure of the industry.
The insolvency industry is centred on licensed insolvency
practitioners, of which there are 1,744 in the United
Kingdom
26
. They are licensed by one of nine regulatory
bodies:
Institute of Chartered Accountants in England & Wales •
(ICAEW)
Insolvency Practitioners Association (IPA) •
Association of Chartered Certi?ed Accountants (ACCA) •
Law Society of England and Wales (LS) •
Institute of Chartered Accountants of Scotland (ICAS) •
Insolvency Service (part of the Department for Business, •
Enterprise and Regulatory Reform) on behalf of the
Secretary of State (SS)
Institute of Chartered Accountants in Ireland (ICAI) •
Law Society of Scotland (LSS) •
Law Society of Northern Ireland (LSNI) •
The numbers of insolvency practitioners licensed by each of
the nine bodies are presented in Figure 7.
Figure 7 Number of insolvency practitioners by
licensing body, United Kingdom, 2007
Source: The Insolvency Service, Law Society of Northern Ireland, speci?cally
requested, October 2007
26 The Insolvency Service, Law Society of Northern Ireland, speci?cally
requested, 2007
The number of individual voluntary arrangements has
also grown rapidly over this time period. The number of
individual voluntary arrangements more than doubled
in 2006 (growing 118 per cent). The rise in personal
bankruptcies and our discussions with industry experts
suggest
23
this rise was also due to the increasing demand
of insolvency procedures by consumer debtors.
There have been three main drivers of the rise in consumer
insolvencies:
Increasing consumer debt •
The Enterprise Act 2002 •
Heightened awareness •
First, the amount of consumer debt has increased, led by
the decreasing cost and rising availability of credit. This
was the reason given for individual insolvency growth in
the majority of interviews. However, as can be seen from
Figure 6, unsecured credit as a percentage of disposable
income has not risen as strongly as insolvencies. In
addition, the affordability
24
of debt has risen at a rate that is
even slower.
Second, The Enterprise Act 2002 reduced some of
the constraints of bankruptcy. This is likely to have
contributed to the rise. Similarly, if the stigma associated
with bankruptcy falls
25
, people are more willing to declare
themselves bankrupt.
Third, the education of the public of individual voluntary
arrangements – through media coverage, advertising
and word of mouth – has led to a heightened awareness
among consumers. This is likely to have contributed to the
growth in personal insolvencies.
23 Additional evidence came from research by Michael Green, which claimed that
the majority of individual voluntary arrangements are in response to excessive
unsecured consumer debt. The report suggested ‘Business debt generated
IVAs now account for probably less than 5-10% of IVAs proposed, approved
or registered. This pattern has prevailed since1994’. Source: The Insolvency
Service Short form report ‘A summary of the principal ?ndings an conclusions’
24 Historically low interest rates have meant re-payment of debt remained at
affordable levels
25 Gross, D; Souleles, N (2002) ‘An Empirical Analysis of Personal Bankruptcy
and Delinquency’ The Review of Financial Studies 15 (1) 319-347; White, M
(1997) ‘Why Don’t More Households File for Bankruptcy?’ Journal of Law,
Economics and Organization 14 (2); Gropp, R; Scholz, J; White, M (1997)
Personal Bankrupcy and Credit Supply and Demand The Quarterly Journal
of Economics 112 (1); 217-251; The Insolvency Service, (2002) Attitudes to
Bankruptcy;
0
100
200
300
400
500
600
700
800
ICAEW IPA ACCA LS ICAS SS ICAI LSS LSNI
The value of the insolvency industry
20
We now examine the ?rms that employ insolvency
practitioners in more detail. We ?rst discuss the type of ?rms
in which insolvency practitioners work, second their turnover
and third the region in which they operate.
The results from our survey of insolvency practitioners
suggest that almost half of insolvency practitioners (49 per
cent) work in accountancy ?rms. Approximately 39 per cent
work for insolvency specialist ?rms. Only nine per cent work
in law ?rms, with the balance accounted for by ‘other ?rms’.
Considering the size of ?rms where insolvency practitioners
operate, some within the industry believe it has become
polarised, with most activity conducted by either large
practices or relatively small ones. Indeed, nearly a third
(30 per cent) of all insolvency practitioners reported the
insolvency-related turnover in their ?rm was in excess of
£10 million (although some of these insolvency practitioners
will be in the same business). Meanwhile, 27 per cent of
insolvency practitioners reported turnover of less than
£500,000. This can be seen in Figure 9.
Figure 9 Turnover of insolvency ?rm, share of
employment, United Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars.
Standard error bars are shown to give a level of accuracy. An explanation is
given in section 6.1.
A network of staff is required to support the insolvency
practitioners and their work. We estimate that, in total,
the industry accounts for 12,700 jobs
27
. This includes:
insolvency practitioners; assistant solicitors and
accountants; and administrative and reception staff.
We de?ne those that work in the insolvency industry as
insolvency practitioners plus those who work within the
insolvency business unit.
There are other people actively involved in the insolvency
sector which are not included in our de?nition. These
include: the insolvency specialist departments within banks
and other lending institutions; asset disposal employees;
debt collectors; people who create and distribute
insolvency specialist information technology software
packages; pension specialists; and specialist insolvency
judiciary.
We now discuss the ?rms that the insolvency practitioners
work for.
There are 714 ?rms
28
in Great Britain that employ licensed
insolvency practitioners. The majority of ?rms (71 per
cent) have only one licensed practitioner; a further ?fteen
per cent of ?rms employ two practitioners. Four employ
50 to 99 practitioners; and one ?rm employs over 100
practitioners. This is shown in Figure 8.
Figure 8 Number of insolvency practitioners
in each insolvency industry ?rm,
Great Britain, 2007
Source: The Insolvency Service, specially requested, 2007
27 Based data from company accounts, The Insolvency Service the Of?ce of
National Statistics and corroborated by our survey of insolvency practitioners.
A full methodology is contained in the technical notes, section 6.2.
28 The Insolvency Service, speci?cally requested
0
100
200
300
400
500
600
1 2 to 5 6 to 10 11 to 20 Above 21
Number of insolvency practitioners
N
u
m
b
e
r
o
f
f
i
r
m
s
0%
5%
10%
15%
20%
25%
30%
35%
Below
£500,000
Between
£500,000 and
£1 million
£1 million to
£2 million
£2 million to
£10 million
Over £10
million
The value of the insolvency industry
21
According to our survey of insolvency practitioners, the
overall rate of turnover growth of the insolvency sector
has been twenty per cent over the last ?ve years. This is
equivalent to a per annum growth rate of a little under four
per cent every year. This compares to an average rate of
turnover growth of ?ve per cent in the accountancy sector
between 2002 and 2005
29
.
Turnover growth in accountancy ?rms and of insolvency
specialist ?rms has been at a similar pace, according to
survey results, as seen in Figure 11. The average rate of
growth of an accountancy ?rm has been twenty per cent
over the last ?ve years and, for insolvency specialist ?rms,
the growth rate has been 22 per cent.
29 Of?ce of National Statistics, Annual Business Inquiry, 2007
This polarisation is not a unique feature of the insolvency
industry; instead it is likely to be a re?ection and a result of
broader trends in accountancy and the wider economy.
Indeed, it is the accountancy ?rms that have the high
turnover. Within accountancy ?rms, more than half of
respondents (53 per cent) reported that their ?rm’s
insolvency related turnover was over £10 million (some
of these respondents are likely to be within the same
accountancy ?rm) while only ten per cent reported turnover
of less than £500,000. In contrast, only twelve per cent of
insolvency specialists and law ?rms reported insolvency
related turnover to be greater than £10 million and 36
per cent of these ?rms reported turnover to be less than
£500,000. These results can be seen in Figure 10.
Figure 10 Turnover of insolvency ?rms by main
activity of ?rm, share of employment, United
Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
0%
10%
20%
30%
40%
50%
60%
70%
Below
£500,000
Between
£500,000
and £1
million
£1 million to
£2 million
£2 million to
£10 million
Over £10
million
Insolvency specialist Based in a law firm
Based in an accountancy firm
The value of the insolvency industry
22
Figure 11 Growth in turnover over last ?ve years
by type of ?rm30, share of respondents, United
Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
We now consider the regions in which the insolvency
industry has presence.
The insolvency industry has a presence across the United
Kingdom with at least 100 insolvency practitioners in
most regions. The exceptions are the North East (with
an estimated 21 practitioners), Wales
31
and Yorkshire
and the Humber (where we estimate there are just under
100). There is, though, a disproportionately high share of
practitioners in London, the South East and the North West
(see Figure 12) even after taking account of the relative size
of these regions (see Figure 13).
30 Law ?rms and ‘other ?rms’ are not included separately as the number of
responses was too low to provide an accurate gauge of growth in these types
of ?rms, although they are included in the overall ?gures.
31 The number of responses from Wales was too low for reliable estimates to be
made
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Overall Based in an accountancy firm Based in an insolvency specialist fir m
Fallen by
50% or
more
Fallen
between
10% and
49%
Fallen
between
1% and 9%
No
change
Grown
between
10% and
49%
Grown
between
10% and
49%
Grown by
50% or
more
The value of the insolvency industry
23
Figure 14 Regions where there are of?ces, share
of respondent’s ?rms with of?ce in region, 2007
Source: cebr survey of R3 members, 2007
This masks regional variation in the type of ?rm where the
insolvency practitioner is based. Large accountancy ?rms
tend to have an of?ce in each of the regions of the United
Kingdom, while law ?rms tend to be based in London.
Although there are insolvency specialists across the United
Kingdom, there is a disproportionately high share in the
North West. This can be seen in Table 4.
Figure 12 Region in which insolvency
practitioner is based
32
, share of insolvency
practitioners, United Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
Figure 13 Number of insolvency practitioners in
each region
33
per million of the region’s population,
2007 (using 2006 population estimates)
Source: cebr survey of R3 members, 2007, and Of?ce of National Statistics
population estimates, 2006
The insolvency industry also has of?ces throughout
the United Kingdom — although, again, there is a
concentration in London, the South East and the North
West. Almost 50 per cent of respondents reported that
their ?rm has an of?ce in central London; and nearly 40 per
cent of respondents stated their ?rm has an of?ce in the
North West (see Figure 14).
32 The number of responses from Northern Ireland was too low for reliable
estimates to be made
33 The number of responses from Northern Ireland was too low for reliable
estimates to be made
0%
5%
10%
15%
20%
25%
C
e
n
t
r
a
l
L
o
n
d
o
n
O
u
t
e
r
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
0
10
20
30
40
50
60
70
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
0%
10%
20%
30%
40%
50%
60%
C
e
n
t
r
a
l
L
o
n
d
o
n
O
u
t
e
r
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
W
a
l
e
s
S
c
o
t
l
a
n
d
N
o
r
t
h
e
r
n
I
r
e
l
a
n
d
O
u
t
s
i
d
e
t
h
e
U
n
i
t
e
d
K
i
n
g
d
o
m
The value of the insolvency industry
24
Table 4 Regions where of?ces are based, share
of organisations with an of?ce in area, 2007
34
Region Accountancy ?rm Insolvency specialist Law ?rm
34
Central London 73% 24% 57%
Outer London 37% 20% 7%
South East 52% 27% 7%
South West 43% 20% 0%
East Midlands 47% 14% 14%
West Midlands 51% 18% 14%
East England 44% 12% 7%
North West 49% 36% 14%
North East 43% 11% 7%
Yorkshire and Humberside 44% 12% 7%
Wales 34% 12% 7%
Scotland 52% 17% 7%
Northern Ireland 38% 3% 0%
Outside the United Kingdom 34% 9% 21%
Number of respondents 73 66 14
Source: cebr survey of R3 members, 2007.
2.6 The insolvency practitioners
In this section, we consider the insolvency practitioners
themselves.
We consider the following topics in more detail, in turn:
The demographics of insolvency practitioners •
The earnings of, and hours worked by, practitioners •
Insolvency practitioners’ education and quali?cations •
Although 79 per cent of insolvency practitioners are male,
women are becoming a growing and signi?cant part of the
industry. The average insolvency practitioner is 46 years
old. However, half of insolvency practitioners under the age
of 35 are female. Within the females, seventeen per cent
are less than 35 years of age; this compares with ?ve per
cent of males. The spread of ages for men and women is
shown in Figure 15.
34 The number of responses from insolvency practitioners based in law ?rms is
not high enough for regional estimates to have a high level of con?dence
Figure 15 Age and gender of insolvency
practitioners, United Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
Of the female insolvency practitioners, there was a
relatively high share (22 per cent) in a top role (chief
executive of?cer/ managing director / executive chairman)
given the lower average age of women. These results can
be seen in Table 5.
0%
10%
20%
30%
40%
50%
60%
70%
25-34 34-44 45-54 55-64 Over 65
Male Female
The value of the insolvency industry
25
Male respondents to our survey typically earned more than
the female respondents. Almost three-quarters of male
insolvency practitioners (74 per cent) earn over £70,000
compared to 23 per cent of women (see Figure 16). These
differences may, though, re?ect the variations in average
age, experience and hours worked.
Earnings also vary by region. Average gross earnings in the
South West and Wales are likely to be less than £100,000 a
year (78 per cent of practitioners in these regions earn less
than £100,000). However, in the other regions and countries
of the United Kingdom, half of insolvency practitioners earn
more than £100,000 (see Figure 17).
Figure 17 Gross basic annual earnings, by
region, percentage of practitioners,
Great Britain
35
, 2007
Source: cebr survey of R3 members, 2007 with standard error bars (see
section 6.1)
35 Due to the number of responses, we were unable to disaggregate information
more than in this ?gure. Similarly, there were not enough responses from
practitioners in Northern Ireland to include it as a region. Information Yorkshire
and Humberside is included in the North and Scotland.
Table 5 Job titles of insolvency practitioners,
percentage of respondents, 2007
Job title Male Female Overall
Chief executive of?cer/ managing director /
executive chairman
31% 22% 29%
Non-executive director / main board director/ director 17% 22% 18%
Head of department / Manager 34% 39% 35%
Other 15% 9% 14%
– of which classi?ed ‘partner’ 15% 9% 14%
Number of respondents 86 23 109
Source: cebr survey of R3 members, 2007
Figure 16 Gross basic annual earnings by
gender, percentage of insolvency practitioners,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007 with standard error bars (see
section 6.2)
We turn to the remuneration of insolvency practitioners.
The average insolvency practitioner has gross annual
earnings of £110,000 a year. In addition, 72 per cent earn
some form of additional bene?ts; 39 per cent receive a
bonus. Earnings and additional bene?ts are discussed in
turn.
Over two-?fths (41 per cent) of insolvency practitioners
responding to our survey reported earnings of over
£100,000 a year. Thirteen per cent of practitioners earn
over £200,000 a year; 49 per cent earned between
£45,000 and £100,000 annually.
0%
10%
20%
30%
40%
50%
60%
Less than £44,999 £45,000 to
£69,999
£70,000 to
£149,999
More than
£150,000
Male Female
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
London South and Wales Midlands and East
of England
North and
Scotland
Less than £100,000 Over £100,000
The value of the insolvency industry
26
Figure 18 Average gross annual earnings by type
of ?rm, share of insolvency practitioners, United
Kingdom, 2007
Source: cebr survey of R3 members, 2007
Table 6 Additional bene?ts of insolvency
practitioners, share, United Kingdom, 2007
Additional bene?t Overall Based in an
accountancy ?rm
Based in an insolvency
specialist ?rm
A bonus 39% 50% 24%
Pension scheme 41% 52% 30%
Medical insurance 54% 60% 43%
Life insurance 40% 57% 22%
No extra bene?ts 28% 26% 46%
Number of respondents 109 58 46
Source: cebr survey of R3 members, 2007
The average insolvency practitioner works 43 hours a week.
This takes into account the practitioners that work part-time.
Practitioners in accountancy ?rms tend to work longer
hours. The average number of hours per week worked by
practitioners in accountancy ?rms and insolvency specialist
?rms is in Figure 19.
Practitioners that work for accountancy ?rms have a higher
gross basic salary than those in insolvency specialist ?rms;
47 per cent of practitioners in an accountancy ?rm earn
over £100,000 compared to 28 per cent of practitioners in
insolvency specialist ?rms (see Figure 18). Part of this can
be explained by the region in which the accountancy ?rms
are based – accountancy ?rms are more likely to be based
in London (see section 2.5).
We turn to the additional bene?ts insolvency practitioners
receive.
The additional bene?ts that practitioners receive also vary
according to the type of company in which they are based
(see Table 6). In particular, 50 per cent of practitioners
based in accountancy ?rms earn a bonus, compared
to 24 per cent that work in an insolvency specialist ?rm.
Of the practitioners based in accountancy ?rms 26 per
cent receive no additional bene?ts. Almost twice as
high a proportion (46 per cent) of practitioners based in
insolvency specialist ?rms receive no additional bene?ts.
0%
5%
10%
15%
20%
25%
30%
35%
40%
Less than
£45,000
£45,000 to
£69,999
£70,000 to
£99,999
£100,000 to
£149,999
More than
£150,000
Based in an accountancy firm An insolvency specialist firm
The value of the insolvency industry
27
Figure 20 Average working week for an
insolvency practitioner, share of time on activity,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007
Insolvency practitioners based in insolvency specialist
?rms spend a higher proportion of their time on formal
insolvency when compared to insolvency practitioners that
work in accountancy ?rms. Although accountancy ?rm
based practitioners spend a greater share of their time
(17 per cent) on preventing insolvency when compared to
insolvency specialist based practitioners (13 per cent) they
spend less time on debt advice (10 per cent versus 15 per
cent). These results are in Table 7.
Figure 19 Total hours worked by type of
insolvency practice, share of practitioners,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007
Insolvency practitioners spend much (42 per cent) of
their time on formal insolvency procedures, equivalent to
twenty hours a week. Seven hours a week are spent on
preventing insolvency. The remaining time is spent on other
insolvency related activities and non-insolvency related
work (see Figure 20).
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Less than 33 hours 33 to 40 41 to 48 more than 48
Based in an accountancy firm Based in an insolvency specialist firm
43%
17%
12%
14%
14%
Formal insolvency
Preventing insolvency
Debt advice
Other insolvency-related work
Non-insolvency related work
The value of the insolvency industry
28
Table 7 Share of time spent on insolvency and
non-insolvency procedures, by type of ?rm
practitioner is based, United Kingdom, 2007
36
All ?rms
36
Accountancy ?rm Insolvency specialist ?rm
Formal insolvency 42% 41% 47%
Preventing insolvency 16% 17% 13%
Debt advice 13% 10% 15%
Other insolvency-related work 14% 15% 13%
Non-insolvency related work 15% 17% 12%
Number of responses 109 58 46
Source: cebr survey of R3 members, 2007
The industry is well educated; 75 per cent of insolvency
practitioners have an ‘A’ level or equivalent and 57 per cent
have a university degree (see Table 8).
Table 8 Quali?cations by age, percentage of
insolvency practitioners, United Kingdom, 2007
Academic quali?cation Overall Under
44 years of age
Between 45 and 54
years old
Over 55 years of age
Professional Quali?cations 94% 98% 95% 86%
University degree or above 57% 67% 57% 36%
‘A’ Level or equivalent 75% 77% 82% 59%
GCSE or equivalent 76% 84% 84% 45%
Other 8% 9% 11% 0%
Number of respondents 109 43 44 22
Source: cebr survey of R3 members, 2007
The university degrees obtained by insolvency practitioners
are wide ranging. The most common degree obtained is in
accountancy or ?nance (seventeen per cent of degrees).
Degrees in economics, politics and business studies are
also among the most commonly obtained degrees, as
seen in Table 9.
Table 9 Degree obtained, as a share of
insolvency practitioners with a degree, United
Kingdom, 2007
Academic quali?cation Overall
Accounting and/ or ?nance 17%
Economics and/or politics 14%
Business Studies and/or commerce 13%
Biology, chemistry and/or psychology 11%
Law 10%
Mathematics 10%
Humanities 10%
Engineering 6%
Other, including languages and music 10%
Total 63
Source: cebr survey of R3 members, 2007
36 This includes law ?rms and ‘other’ ?rms. The number of responses was too low
to have stand alone results for practitioners from these types of ?rms.
The value of the insolvency industry
29
3. The importance and impact of the
insolvency industry
This chapter considers the importance the insolvency industry,
both directly and indirectly.
The key ?ndings are:
Direct employment in the industry is estimated to be 1.
12,700 jobs — more than twice the number of people
employed in the ?nancial leasing sector
Gross value added of the insolvency industry is estimated 2.
to be an annual £780 million, equivalent to ?ve per cent of
the accounting profession and 0.08 per cent of the total
economy
The insolvency sector has the greatest contribution to the 3.
North West’s economy, contributing an estimated 86 pence
per thousand pound of the region’s gross value added
The insolvency industry’s spending on goods and services 4.
in other industries generated a further £186 million,
spending by employees creates an additional £230 million.
The total multiplier effect is £417 million, equivalent to 0.04
per cent of the economy
We estimate the industry is responsible for saving 910,000 5.
jobs in 2006. The number of jobs saved through formal
insolvency proceedings was 312,000. We estimate a
total of 598,000 employees were saved through rescue
procedures. The businesses which were rescued
contributed approximately £132 billion in turnover
Our analysis of World Bank data suggests that the 6.
insolvency regime may be one of the most important
factors in stimulating a prosperous economy – there is a
strong relationship between the amount recovered when a
business is closed and economic growth, prosperity and
investment
The analysis showed that the time it takes to close a 7.
business also has a strong relationship with economic
growth and GDP per capita. The correlation with
investment was not as strong
The cost of closing a business was not as strongly related 8.
with the economy, although some relationship was
uncovered
The value of the insolvency industry
30
In this chapter, we consider the impact and importance of
the insolvency industry on the United Kingdom economy both
directly and indirectly.
First, we identify the direct contribution of the insolvency sector
to the United Kingdom using conventional measures such
as employment and gross value added. Second, we quantify
the indirect contribution through its employees’ spend and
acquiring inputs from other industries. Third, we look at how
the industry uses its expertise to save businesses and their
employees. Fourth, we investigate how the industry creates
an environment that is conducive to entrepreneurship and
appropriate risk taking.
3.1 The direct impact of the insolvency sector
In this section, we consider ‘direct’ measures of the insolvency
industry’s contribution to the United Kingdom economy,
through the gross value added of and employment in the
industry itself.
The conventional measures of the economic contribution made
by a sector to the economy are measures of employment and
gross value added (GVA)
37
. These are direct measures of the
scale of the industry itself; they do not evaluate any knock-on
bene?ts that the insolvency industry may have in other sectors.
We estimate the direct employment in the insolvency industry
to be approximately 12,700 jobs
38
in 2007, equivalent to 5.9
per cent of the accounting, bookkeeping and auditing services
sector (see Table 10). The insolvency industry employs more
than twice the number of people in the ?nancial leasing sector.
Table 10 Employment by industry, Great Britain,
2005 (insolvency sector UK 2007)
39
Industry Employment
Legal, accounting, book-keeping and auditing activities
39
936,600
Legal activities 270,100
Accounting, book-keeping and auditing activities 214,000
Secretarial and translation services 21,800
Photographic activities 27,500
The insolvency industry 12,700
Financial leasing 5,200
Source: Of?ce for National Statistics: annual business inquiry, 2005, and
cebr survey and analysis, 2007
37 A key measure of economic output is gross value added (GVA). GVA is de?ned
as gross output, or turnover, minus the value of intermediate goods and
services used in its production in an accounting period. The GVA generated
by a industry/industry is, to a ?rst degree of approximation, the sum of the
remuneration of employees and pro?t generated by the company or industry.
There is a close link between GVA and gross domestic product (GDP).
Speci?cally GVA at current basic prices plus taxes on products less subsidies
on products is equal to GDP at current market prices. The GVA of an industry
or region can be though of as its contribution to national GDP.
38 Based data from company accounts, The Insolvency Service the Of?ce of
National Statistics and corroborated by our survey of insolvency practitioners.
A full methodology is contained in the technical notes, section 6.2.
39 Includes tax consultancy; market research and public opinion polling; business
and management consultancy; holdings
London has the highest employment (with 3,100
employees); 2,200 people (sixteen per cent) are employed
in the South East and 2,000 are employed in the North
West. There are over 600 people employed in each region
of the Great Britain, excluding Wales and the North East,
as seen in Figure 21.
Figure 21 Number of people employed in the
insolvency industry
40
by region in Great Britain
41
(2007), thousand
Source: Of?ce for National Statistics: annual business inquiry, 2005; cebr
survey of R3 members, 2007
We now examine employment in the insolvency sector as
a share of the legal and accounting sector’s employment
42
.
This is because this is the sector the insolvency industry
would fall.
The insolvency sector employs 1.4 per cent of
Great Britain’s legal, accounting, book-keeping
and auditing activities sector. Despite a large
share of insolvency practitioners, and their
?rms, being based in London (see section 2.5),
it accounts for less than the average (1.1 per
cent) of Great Britain’s legal and accounting
employment. The North West’s insolvency
employment accounts for 2.3 per cent. This
share is greater than any other region. The North East’s
insolvency employment accounts for the lowest share
(excluding Wales
43
), at 0.7 per cent.
40 Of?ce of National Statistics, Annual Business Inquiry, 2007, latest data relates
to 2005 and Companies House, 2007, survey of insolvency professionals and
cebr analysis.
41 The number of responses from Northern Ireland was not high enough for a
reasonable estimate of employment to be made. Similarly, we have included
Wales in our results from the South West due to a low number of responses
42 Of?ce of National Statistics standard industrial classi?cation group 741: Legal,
accounting, book-keeping and auditing activities; tax consultancy; market
research and public opinion polling; business and management consultancy;
holdings
43 The number of responses from Wales was too low for an reliable estimate of
employment share. Figures for Wales have therefore been included with ?gures
from the South West
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
T
h
e
H
u
m
b
e
r
S
c
o
t
l
a
n
d
The value of the insolvency industry
31
Figure 23 Gross value added by region, billion,
Great Britain
47
, 2006
Source: Of?ce for National Statistics: regional accounts, 2007
Turning to the insolvency sector’s contribution to each
region’s economy, the insolvency sector has the greatest
contribution to the North West’s economy, as seen in
Figure 24. The insolvency sector contributes an estimated
86 pence per thousand pound of the region’s gross value
added. The insolvency sector has the smallest contribution
to the Welsh economy. However, the sector still contributes
nine pence for every thousand pound of the Welsh gross
value added.
Figure 24 Gross value added from insolvency
industry as a share of regions’ total GVA, pence
per thousand pound, United Kingdom, 2006
Source: Of?ce for National Statistics: annual business inquiry; cebr survey of
R3 members, 2007
47 The number of responses from Northern Ireland was too low for an reliable
estimates to be made. Similarly, the number of responses from Wales was low,
therefore ?gures for Wales have been included with ?gures from the South West
Figure 22 Employment in the insolvency
industry
44
(2006), as a share of employment in
legal, accounting, bookkeeping and auditing
activities, by region in Great Britain
45
(2005)
Source: Of?ce for National Statistics: annual business inquiry, 2005; cebr
survey of R3 members, 2007
The gross value added, or economic output, of the
insolvency industry is estimated to be £780 million per
annum
46
in 2006, which is equivalent to two per cent of
the legal and accounting sector and ?ve per cent from the
accounting profession. The insolvency industry’s direct
contribution to the United Kingdom economy is 0.08 per
cent of gross domestic product in 2006.
We compare the gross value added generated in each
region’s insolvency sector with gross value added
generated by each region’s economy as a whole.
The gross value added by London and the South East of
England is almost double that of the other regions in the
United Kingdom, as seen in Figure 25. Wales, Northern
Ireland and the North East are smaller than other regions of
the United Kingdom and have a lower contribution to the
economy.
44 Of?ce of National Statistics, Annual Business Inquiry, 2007, latest data relates
to 2005 and Companies House, 2007 and cebr analysis.
45 Comparable data was not available for Northern Ireland
46 Of?ce of National Statistics, Annual Business Inquiry, 2007, latest data relates
to 2005 and Companies House, 2007, cebr survey of insolvency practitioners
(2007) and cebr analysis. Annual Business Inquiry data relates to 2005 and as
a result GVA estimates are likely to be an underestimate, however, at the time
of analysis more up to date data are not available.
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
T
h
e
H
u
m
b
e
r
S
c
o
t
l
a
n
d
£0
£50
£100
£150
£200
£250
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
-
10
20
30
40
50
60
70
80
90
100
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
W
a
l
e
s
S
c
o
t
l
a
n
d
N
o
r
t
h
e
r
n
I
r
e
l
a
n
d
The value of the insolvency industry
32
3.2 The indirect contribution to
the economy
In this section, we analyse the indirect contribution of the
insolvency sector to the United Kingdom economy through
the ‘multiplier effect’
49
.
The ‘multiplier effect’ is the economic contribution that
results from the sector’s revenues being recycled through
spending on suppliers and their staff. We consider two such
indirect impacts:
upstream purchases – buying goods and services from •
other industries. As the insolvency industry buys inputs
from other sectors, it generates economic activity and
employment in these suppliers
employees’ spending – the part of the wages and salaries •
that employees of the insolvency industry spend on
consumer goods and services, also supports economic
activity and employment
The ‘multiplier effect’ is the sum of the upstream effect and
employees’ spend.
Total upstream purchases by the insolvency industry are
estimated to be an annual £186 million, equivalent to 0.02 per
cent of the economy’s gross domestic product in 2006. The
main sector the insolvency industry buys goods and services
from the education sector
50
; ten per cent of expenditure is
on education, equivalent to £19 million (see Table 11). Nine
per cent of the insolvencies expenditure is on legal activities,
equivalent to £17 million. Six per cent of spend is on the
accountancy industry, equivalent to £11 million.
Table 11 Upstream spend of insolvency industry,
percentage of intermediate consumption, United
Kingdom, 2005
Industry Million Share of spend
Education £19 10%
Legal activities £17 9%
Computer services £15 8%
Architectural activities and technical
consultancy
£13 7%
Other business services £12 6%
Accountancy services £11 6%
Postal and courier services £10 5%
Telecommunications £8 5%
Owning and dealing in real estate £8 4%
Ancillary transport services £6 3%
Source: Of?ce of National Statistics, 2005 and cebr survey and
analysis, 2007
49 The methodology we employed to estimate the multiplier effects is contained in
section 6.1
50 As de?ned by Of?ce of National Statistics standard industry classi?cation 80:
education. It includes schooling and adult education and training
We analyse the contribution of the insolvency industry
to each region’s business activities sector. The business
activities sector includes all legal, accounting, advertising
and architecture industries
48
.
The North West’s insolvency industry contributes
the largest amount to its business services sector, in
comparison to all other regions (see Figure 25). The
insolvency sectors in Scotland and the East Midlands also
contribute a large amount to their business services sector
when compared to the other regions.
Figure 25 Gross value added from insolvency
industry, as a share of business services sector
GVA, Great Britain, 2007
Source: Of?ce for National Statistics: annual business inquiry; cebr survey of
R3 members, 2007
48 We use the business services sector rather than the legal and accounting
sector because regional gross value added data is not available for the smaller
latter sector
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
W
a
l
e
s
S
c
o
t
l
a
n
d
N
o
r
t
h
e
r
n
I
r
e
l
a
n
d
The value of the insolvency industry
33
saved through rescue proceedings in 2006.
54
Considering rescue procedures, as well as formal
proceedings, we estimate the industry is responsible
for saving 910,000 jobs in businesses with a combined
turnover of £132 billion per annum in 2006.
55
Some caution is needed when interpreting these estimates
of jobs saved. A person employed in a company following
formal insolvency proceedings is de?ned here as having their
job retained, or ‘saved’. This does not necessarily mean that
those who have had their job ‘saved’ would have become
unemployed if an alternative to insolvency proceedings had
taken place — nor does it mean that the job has been saved
through the direct intervention of the insolvency practitioner.
However, this measure does give an indication of the scale
of the insolvency industry’s importance. Meanwhile, there
are alternative measures of the insolvency industry’s impact
that we have not tried to estimate as part of this research
— such as the magnitude of assets recycled into pro?table
activities.
We now analyse the types of businesses that the insolvency
industry assisted in 2007. We ?rst consider the ?rms’
turnover. Second, we examine the region the business was
based. Third we consider which sectors the business’s main
activity was in.
According to our survey of insolvency practitioners
56
:
almost two-thirds (66 per cent) of businesses helped by
the insolvency industry in 2007 had turnover of less than
£1 million a year; 43 per cent of businesses had turnover
less than £500,000. Within formal proceedings: 53 per cent
had turnover of less than £500,000 a year; 22 per cent had
turnover over £1 million. This compares to eighteen per cent
of companies that were rescued having turnover of less than
£500,000 and 64 per cent having turnover greater than £1
million.
We now turn to the region of the business’s main activity.
Our survey of insolvency practitioners indicates a somewhat
different geographical distribution of failing businesses than
that suggested by of?cial data.
54 Calculated as 3,300 x 220 x 80%. Numbers as reported do not compute exactly
due to rounding
55 Our survey of R3 members captured data on the turnover of businesses involved
in formal and informal insolvency proceedings. These data were used to calculate
the £132 billion estimate.
56 See section 6.9 for survey questionnaire
The employees of the industry contribute a further £230
million to the economy, through their spending on goods
and services. The total multiplier effect is therefore £417
million, equivalent to 0.04 per cent of the economy.
3.3 Saving businesses from insolvency
and protecting employees
In this section we consider a further contribution of the
insolvency industry to the United Kingdom economy: the
jobs and businesses it saves.
In addition to its direct and indirect contribution to gross
value added and employment, the insolvency industry
helps protect and promote the general prosperity of the
United Kingdom through the outcome of the work it
does. In this section we examine how the sector directly
supports businesses through the services it provides for
insolvent companies. In particular, we look at the number
of businesses and jobs saved by the industry.
Of?cial ‘jobs saved’ numbers are not available, so we have
combined of?cial data on the number of insolvencies with
the results of our own survey of R3 members to produce
estimates of the number of jobs saved during processes
involving insolvency practitioners.
Of?cial ?gures show that insolvency practitioners dealt with
28,700 business failures
51
in 2006. This includes 17,800
corporations and 10,900 self employed businessmen; a
further 6,100 businesses went through rescue procedures.
Respondents to our survey report that the companies
put through formal proceedings had an average of 25
employees before the process began and eighteen
employees when the process was completed.
52
So,
on average, 72 per cent of the workforce was retained
(or ‘saved’) after formal insolvency. This equates to a
total number of jobs saved through formal insolvency
proceedings of 312,000
53
in 2006 in corporations alone.
According to of?cial data, a further 3,300 business were
saved through rescue procedures in 2006. Although fewer
?rms go through rescue rather than formal proceedings,
our survey results show they are typically bigger with an
average of 220 employees in the company before the
rescue procedures begin. After the procedures have been
completed, 80 per cent of employees remain employed.
Therefore, we estimate a total of 598,000 employees were
51 Insolvency service, Statistical release: insolvencies in the third quarter 2007 and
Of?ce of National Statistics, 2007
52 Estimated from our survey of insolvency practitioners, 2007
53 Calculated as 17,800 x 25 x 72%. Numbers as reported do not compute
exactly due to rounding. Methodology is in section 6.4
The value of the insolvency industry
34
Our survey of R3 members also provides insight into the
activities of businesses dealt with by the insolvency industry.
Respondents reported that manufacturing ?rms had a
relatively high share of their assistance; they accounted for
one-in-?ve cases (see Figure 28).
The survey also suggests that the sector a business is in
does not in?uence whether it will be put through formal
procedures or a rescue (see Table 12).
Figure 28 Main activity of client,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007
Insolvency practitioners reported that they worked with
more businesses in the South East (22 per cent) than any
other region, followed by the Midlands (sixteen per cent),
London (fourteen per cent) and the North West (thirteen
per cent) (see Figure 26). Of?cial statistics, on the other
hand, suggest that London businesses account for the
largest share of company insolvencies (see Figure 27). This
may re?ect, in part, the emphasis in of?cial statistics on the
location of ?rms’ registered and headquarters’ addresses
– often London – rather than the locations from which they
trade.
Figure 26 Region of client’s main business
activity, Great Britain, 2006
Source: cebr survey of R3 members, 2007
Figure 27 Company insolvencies by region
57
,
England and Wales, 2006
Source: The Insolvency Service, speci?cally requested, 2007
57 Regions based on insolvency service de?nitions, speci?cally requested
information
0%
5%
10%
15%
20%
25%
30%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
M
i
d
l
a
n
d
s
N
o
r
t
h
E
a
s
t
,
Y
o
r
k
s
h
i
r
e
&
t
h
e
H
u
m
b
e
r
N
o
r
t
h
W
e
s
t
E
a
s
t
o
f
E
n
g
l
a
n
d
S
c
o
t
l
a
n
d
0%
5%
10%
15%
20%
25%
30%
35%
40%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
M
i
d
l
a
n
d
s
A
n
g
l
i
a
r
e
g
i
o
n
N
o
r
t
h
E
a
s
t
N
o
r
t
h
W
e
s
t
0%
5%
10%
15%
20%
25%
M
a
n
u
f
a
c
t
u
r
i
n
g
F
i
n
a
n
c
e
a
n
d
b
u
s
i
n
e
s
s
s
e
r
v
i
c
e
s
C
o
n
s
t
r
u
c
t
i
o
n
W
h
o
l
e
s
a
l
e
R
e
t
a
i
l
T
r
a
v
e
l
a
n
d
t
r
a
n
s
p
o
r
t
T
e
c
h
n
o
l
o
g
y
m
e
d
i
a
a
n
d
t
e
l
e
c
o
m
m
s
L
e
i
s
u
r
e
O
t
h
e
r
The value of the insolvency industry
35
In this section we examine economic performance using
three measures. The ?rst is economic prosperity, measured
by gross domestic product per capita. The second is the
propensity to invest, measured by investment as a share
of gross domestic product. The third is the rate of growth,
measured as average growth in gross domestic product
since the year 2000. These are now examined in turn.
We ?rst analyse the relationship between the business
indicators and economic prosperity, measured by gross
domestic product per capita.
The recovery rate when a business is closed (i.e. the cents
on the dollar recouped by creditors through the bankruptcy
or insolvency proceedings) has the strongest relationship
with economic prosperity of all the ease of business
indicators collected by the Bank, as seen in Table 13. The
relationship can be seen in Figure 29. This ?nding suggests
that the more con?dent creditors can be in a country
regarding repayment, the more likely it is that the economy
will be prosperous.
Table 12 Clients’ main business activity, by
nature of work, 2007
Sector Overall Formal insolvency Rescue
Manufacturing 20% 20% 24%
Finance and business services 8% 7% 8%
Construction 14% 16% 12%
Wholesale 5% 6% 5%
Retail 13% 15% 11%
Travel and transport 5% 4% 10%
Technology media and telecoms 9% 10% 7%
Leisure 7% 8% 5%
Other 19% 15% 19%
Total responses 604 418 106
Source: cebr survey of R3 members, 2007
3.4 Encouraging entrepreneurship
and liquidity
We now turn to the broader signi?cance of the insolvency
industry — its role in creating an environment that is
conducive to entrepreneurship and appropriate risk taking.
It is widely understood that the prosperity and growth of
an economy is in large part dependent on its ability to
encourage entrepreneurship, innovation and appropriate
risk taking, with the support of liquid and ef?cient capital
markets. The insolvency industry — and the regime within
which it operates — is central to this by supporting and
safeguarding both entrepreneurs and creditors.
Analysis of World Bank data that we have conducted for
this report suggests that the insolvency regime may be one
of the most important factors in stimulating a prosperous
economy.
The World Bank provide data on the ‘ease of doing
business’ in 175 countries; these cover 39 objective
measures of different characteristics of each economy. We
have examined
58
how strongly correlated each of these
characteristics are with the overall economic performance
of the economies.
Out of the 39 measures, three are related to the insolvency
industry:
The amount recovered when an exemplar business is •
closed
59
The time taken to close an exemplar business •
The cost of closing an exemplar business •
58 For methodology see section 6.5
59 To ensure comparability across countries, the World Bank calculate the
outcomes in each jurisdiction for the same exemplar business (see section 6.5).
As such, the World Bank data do not necessarily re?ect the average outcome
in each jurisdiction as the exemplar case may be more or less representative of
that country’s average case.
The value of the insolvency industry
36
Figure 29 Correlation between economic
prosperity and amount recovered when a
business is closed*, 68 countries
60
, 2007
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, Organisation for
Economic Co-operation and Development (OECD) and cebr analysis, 2007
* Note: Recovery rates quoted are based on the outcome a speci?c
scenario developed and consistently applied by the World Bank. It is not
a measure of average recovery rates across each jurisdiction. Indeed, we
recognise that average recovery rates in the United Kingdom are much
lower than this speci?c example.
The analysis showed that the time it
takes to close a business also had a
strong, negative relationship with gross
domestic product per capita (twelfth
strongest, see Table 13). This shows
that strong and prosperous economies
tend to be found in those countries in
which it is quick to close a business.
Figure 30 shows the relationship
between the time to close a business
and gross domestic product per capita.
60 We included countries where we have data on both the amount recovered
when a business is closed and GDP per capita
$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
0% 20% 40% 60% 80% 100%
Amount recovered when a business is closed
G
D
P
p
e
r
c
a
p
i
t
a
,
t
h
o
u
s
a
n
d
,
2
0
0
4
United
Kingdom
Figure 30 Correlation between economic
prosperity and time to close a business, 68
countries
61
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr analysis,
2007
Table 13 World Bank variables and correlation
with GDP per capita, across 68 countries, 2006
62
Rank
62
World Bank indicator Correlation
(1) The ease of doing business index (ranking) -0.82
1 (2) Amount recovered when a business is closed (%) +0.81
2 (3) Time to import across borders (days) -0.71
3 (4) Documents needed to import -0.70
4 (5) Time to export (days) -0.68
5 (6) Getting credit, private bureau coverage (% of adults) +0.64
6 (7) Enforcing contracts (number of procedures) -0.63
7 (8) Depth of credit information (index) +0.60
8 (9) Starting a business (number of procedures) -0.60
9 (10) Documents needed to export (number) -0.60
12 (13) Time taken to close a business (years) -0.52
19 (20) Cost of closing a business (% of estate) +0.46
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr analysis,
2007
61 We included countries where we have data on both the amount recovered when
a business is closed and GDP per capita
62 The ease of business indicator is a composite index, whereas other indicators are
independent business indicators. Therefore, technically, it should not be directly
compared with the other indicators.
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
0 2 4 6 8 10
Time to close a business, years, 2006
G
D
P
p
e
r
c
a
p
i
t
a
,
t
h
o
u
s
a
n
d
,
2
0
0
4
United
Kingdom
The value of the insolvency industry
37
We now turn to analysing the relationship between the
propensity to invest and the insolvency industry.
In terms of the link between different ease of doing business
variables and the proportion of gross domestic product
accounted for by investment, we again ?nd correlation
between various features of the insolvency regime and this
measure of economic success.
The recovery rate has the strongest relationship with
investment out of all 39 factors examined, as seen in Table
14. The time to close a business and cost of closing a
business were weakly related to investment as a share of
gross domestic product, although some relationship was
uncovered. This suggests creditors’ con?dence is strongly
linked with investment in a country.
Table 14 World Bank variables and correlation
with investment as a share of GDP, across 68
countries, 2006
64
Rank
64
World bank index Correlation
1 (1) Amount recovered when a business is closed (%) +0.57
- (2) The ease of doing business (ranking) -0.51
2 (3) Time to import across borders (days) -0.48
3 (4) Time to export (days) -0.47
4 (5) Cost to import (cost per container) -0.44
5 (6) Cost of registering property (% of estate) -0.43
6 (7) Getting credit, ease of information index +0.43
7 (8) Documents needed to import -0.42
8 (9) Documents needed to export -0.39
9 (10) Procedures to register a property -0.38
23 (24) Time to close a business (years) -0.23
26 (27) Cost of closing a business (% of estate) -0.18
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of Production,
Income and Prices, Penn world tables, OECD and cebr analysis, 2007
64 The ease of business indicator is a composite index, whereas other
indicators are independent business indicators. Therefore, technically,
it should not be directly compared with the other indicators.
The cost of closing a business also has a strong
relationship with the strength of a country’s economy,
although it is not as strong as the recovery rate or time
to close a business, as seen in Figure 31. This suggests
that, as the cost of closing a business (as a percentage of
the cost of the estate) falls, a country is more likely to be
prosperous.
Figure 31 Correlation between economic
prosperity and cost of closing a business, 68
countries
63
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr
analysis, 2007
63 We included countries where we have data on both the amount recovered
when a business is closed and GDP per capita
United
Kingdom
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
0 20 40 60 80
Cost of closing a business, percentage of estate, 2006
G
D
P
p
e
r
c
a
p
i
t
a
,
t
h
o
u
s
a
n
d
,
2
0
0
4
The value of the insolvency industry
38
It is also important to look at the growth
of the economy, as well as the overall
prosperity. Growth is also strongly related
to the insolvency regime. In particular,
there is a strong relationship between the
gross domestic product growth rate and
the amount recovered when a business
is closed, as seen in Figure 32. This
relationship was stronger than all other ease
of business variables, except the total tax
on a business, as seen in Table 15.
The time to close a business also has
a strong relationship with the growth of
an economy. Taking less time to close a
business is closely related to having faster
economic growth. The cost of closing
a business was not as strongly related
to economic growth. These results are
included in section 6.1.
Figure 32 Correlation between economic
growth and amount recovered when a business
is closed GDP growth, OECD countries with
GDP per capita greater than $20,000 per annum,
current prices
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr
analysis, 2007
0%
1%
2%
3%
4%
5%
6%
7%
0 20 40 60 80 100
Amount recovered when a business is closed, percentage
G
D
P
g
r
o
w
t
h
r
a
t
e
,
a
v
e
r
a
g
e
a
n
n
u
a
l
p
e
r
c
e
n
t
a
g
e
c
h
a
n
g
e
(
2
0
0
0
-
2
0
0
6
)United
Kingdom
Table 15 World Bank variables and correlation
average annual GDP growth between 2000 and
2006, 20 OECD countries
65
, 2006
Rank World bank index Correlation
1 Total tax (% of pro?t) -0.47
2 Recovery rate when a business is closed +0.47
3 Number of tax payments a year -0.42
4 Strength of investor protection (index) +0.42
5 Ease of shareholder suits (index) +0.41
6 Number of procedures to start a business +0.40
7 Cost of dealing with licenses (% of income per capita) -0.40
8 Time to close a business (years) -0.39
9 Number of procedures to enforce a contract -0.39
10 Minimum capital to start a business (of income per capita) -0.36
(11) The ease of doing business (ranking) -0.34
31 (32) Cost of closing a business (% of estate) -0.07
Sadly, many excellent researchers have stumbled when
attempting to codify these relationships, and doubt remains
about the precise nature and strength of them. Our analysis
does not prove causality and we do not suggest that the
insolvency regime’s contribution to an economy can be
viewed in isolation. However, our results do highlight the
importance of an economy’s business failure regime to its
overall success.
65 We included all OECD countries where we had consistent data on the economic
growth and the World Bank’s ease of doing business indicators
The value of the insolvency industry
39
4. Strengths and weaknesses of the United
Kingdom’s insolvency industry
This chapter considers the strengths and weaknesses of the
insolvency sector, including a comparative analysis against
other international jurisdictions.
The key ?ndings are:
1. The insolvency regime, and in particular, the balance
between debtor’s and creditor’s interests can have
signi?cant effects on the overall economy. Evidence
suggests the relationship is complex and non-linear
2. The United Kingdom is ranked tenth out of 175 countries
by the World Bank for the amount recovered for creditors
when a business is closed
3. World Bank data suggest that, of 127 countries analysed,
the United Kingdom is ranked ninth quickest — with the
time taken to close a typical business being one year. Data
from our survey of insolvency practitioners support this
?nding
4. The United Kingdom did not fare as well when compared
to the rest of the world in terms of the cost of closing a
business. The cost of closing a business includes court
costs, fees of insolvency practitioners, independent
assessors, lawyers and accountants. The United Kingdom
was ranked 22nd with the average cost estimated to be six
per cent of the value of the estate
5. Issues relating to the regulation of the industry were
recurrent both in the responses to our survey of insolvency
professionals and in our discussions with industry leaders
and experts, although there was no clear consensus over
whether the regulatory regime is a strength or a weakness
of the United Kingdom industry
6. Having eight parallel regulators (and The Insolvency Service
also licensing) was seen as the industry’s main weakness in
our survey of insolvency employees. It was considered that
it reduces the ability for regulators to adapt to a changing
environment. It also affects the perceived consistency and
transparency of the industry and can lead to duplication
of effort in order to ensure consistent and transparent
regulation. There is also a risk that there will be unnecessary
regulation
The value of the insolvency industry
40
regimes dif?cult. This compounds a lack of comparable data
on the impacts of insolvency regimes. As such, much of the
academic literature focuses on the United States, where
a more robust comparison between states is possible.
We now turn to ?ndings that have come from analysis of
different insolvency regimes in the United States and its
impact on entrepreneurship and liquidity.
In the United States, some states have different levels of
assets that are exempt from the bankruptcy procedure.
In some states the level of exemption is low – almost all
assets can be liquidised for redistribution to creditors. In
other states, the level is much higher; for example, in Texas
housing property is fully exempt regardless of value. This
has given many academics the chance to analyse the effect
of bankruptcy regimes – how ‘debtor friendly they are’ –
and the implications for entrepreneurship and other factors
such as liquidity. Figure 33 synthesises the ?ndings of much
of the research
66
conducted on the United States. The
?gure shows how increasing debtor-friendliness, measured
using the homestead exemption rate, has a complex non-
linear impact on levels of self-employment – an indicator of
entrepreneurial activity.
According to the academic studies, only those states
where between half and three-quarters of ‘homestead
assets’ are exempted from bankruptcy redistribution have
entrepreneurship rates above regimes where no such
assets are exempted. At other levels of debtor friendliness,
the ‘credit access effect’ dominates and the level of
entrepreneurship is lower. These studies suggest that only
minor changes to an insolvency regime can have signi?cant
knock-on impacts for the economy.
66 Georgellis, Y., Wall, H.J., ‘Entrepreneurship and the Policy Environment’, Federal
Reserve Bank of St. Louis Review 88(2), 2006, pp 95-111. Fan, W., White, M.J.,
‘Personal Bankruptcy and the Level of Entrepreneurial Activity’, Journal of Law
and Economics 46, 2003, pp 543 – 568. Armour, J., ‘Personal Insolvency Law
and the Demand for Venture Capital’, European Business Organization Law
Review 5, 2004, pp 87 – 118. Berkowitz, J., White, M.J., ‘Bankruptcy and small
?rms’ access to credit’, The RAND Journal of Economics 35:1, 2004, pp. 69-84.
White, M.J., ‘Personal Bankruptcy: Insurance, Work Effort, Opportunism and the
Ef?ciency of the ‘Fresh Start’, 2005.
In this chapter, we consider the strengths and weaknesses
of the insolvency industry.
Wherever possible examining how the United Kingdom’s
insolvency industry performs internationally, we consider
the industry’s:
balancing of creditors’ and debtors’ interests •
ef?ciency •
regulation •
4.1 The balance between creditor’s and
debtor’s interests
In this section, we analyse the affect of an insolvency
regime on creditors’ and debtors’ behaviour. We explore
the trade off between the two parties’ interests that needs
to be taken into account when assessing an insolvency
regime.
The design of an insolvency regime – and striking the
balance between creditors and debtors – is not a trivial
matter. However, evidence suggests in the United Kingdom
the relationship is well balanced.
When looking at the creditor-debtor balance there are two
opposing in?uences that need to be considered:
As systems become more debtor friendly, people are •
encouraged to take more ?nancial risk. This increases
demand for credit and this credit promotes economic
activity. Debtors are, in effect, insured against not
being able to make repayments on their debt. This is
sometimes known as the insurance effect.
More debtor friendly regimes discourage creditors to •
lend as they are have a greater exposure to the risk;
creditors increase the cost of credit and/or restrict
availability of credit. This may reduce liquidity in the
economy. This is sometimes known as the credit access
effect.
There are also social implications of bankruptcy. Having a
more debtor friendly regime minimises personal issues that
can be associated with bankruptcy, however this is also
likely to increase the likelihood of culpable behaviour or
inappropriate risk taking.
Our review of the academic literature has found little
research into this trade off in the United Kingdom or other
jurisdictions, except the United States.
Different jurisdictions are debtor or creditor friendly in
different ways; they deploy different instruments in diverse
legislative environments making comparison across
The value of the insolvency industry
41
We look at these in turn.
The World Bank’s regular comparison of jurisdictions
68
provides internationally comparable data on the typical
proportion of outstanding debt returned to creditors after a
business is closed.
These World Bank data suggest that the United Kingdom
insolvency industry would be successful in recovering 85
per cent of the World Bank’s exemplar business’s assets
when closed. This compares to an average of 25 per cent
out of 127 countries
69
, and a maximum of 93 per cent
in Japan. The United Kingdom is ranked tenth out of the
127 countries. As discussed in section 3.4, our research
has shown that there is a strong correlation between the
return to creditors after closure and an economy’s level of
investment and overall prosperity.
68 World Bank and International Finance Corporation, Doing Business 2007 ‘How
to reform’, 2007. See section 6.5 for further details
69 Some of the 175 countries in their dataset have ‘no practice’ and are therefore
not included in the ranking, World Bank Ease of World Bank and International
Finance Corporation, Doing Business 2007 ‘How to reform’, 2007
Source: Georgellis, Y., Wall, H.J.,
‘Entrepreneurship and the Policy
Environment’, Federal Reserve
Bank of St. Louis Review 88(2),
pp 95-111, 2006
Figure 33 Relationship between insolvency
regime (exemption level) and entrepreneurship,
United States
The research into varying homestead exemption rates in
states of the United States has only limited direct relevance
to the United Kingdom. Meanwhile, although there is
a signi?cant body of research into the United Kingdom
insolvency industry, little has looked at either the links
between the sector and national economic performance, or
the comparative strengths and weaknesses of the United
Kingdom regime versus those of other jurisdictions.
67
Instead, we have had to collate data ourselves from which
to draw such conclusions.
We attempt to measure how the United Kingdom’s
insolvency regime compares internationally for its balance
between debtor and creditor interests by considering two
factors:
The amount a creditor receives versus the amount a •
debtor retains; which provides an estimate of creditor
protection
The restrictions a bankrupt is subject to •
67 Armour, J, Hsu, A and Walters, A ‘The Impact of the Enterprise Act 2002 on
Realisations and Costs in Corporate Rescue Proceedings’, 2007; Look Chan
Ho ‘Insolvency meets ?nancial assistance: MT Realisations v Digital Equipment
(2002)’ 17 J.I.B.F.L. 443-447; Armour, J., Cumming, D., ‘Bankruptcy Law and
Entrepreneurship’, University of Cambridge Centre for Business Research
Working Paper No. 300, 2005. Gladstone, B., Lane Lee, J., ‘The Operation of
the Insolvency System in the U.K.: Some Implications for Entrepreneurialism’,
Small Business Economics 7, 1995, pp55-66.
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0
%
1
0
%
2
0
%
3
0
%
4
0
%
5
0
%
6
0
%
7
0
%
8
0
%
Homestead exemption rate
D
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
n
o
e
x
e
m
p
t
i
o
n
e
n
t
r
e
p
r
e
n
e
u
r
s
h
i
p
r
a
t
e
Insurance effect
dominates
Credit access
effect dominates
Increasing ‘debtor friendliness’
I
n
c
r
e
a
s
i
n
g
e
n
t
r
e
p
r
e
n
e
u
r
s
h
i
p
0
%
1
0
%
2
0
%
3
0
%
4
0
%
5
0
%
56
0
%
7
0
%
8
0
%
Homestead exemption rate p
Credit access
effect dominates
The value of the insolvency industry
42
Table 17 Selection of variables for ‘debtor
friendliness’, ?fteen countries, 2007
707172
Country Disabilities
70
Composition
71
Crimes
72
United Kingdom 2 1.00 0
Austria 0 1.25 0
Belgium 3 1.00 0
Canada 2 1.16 0
Denmark 3 1.35 0
Finland 3 0.80 0
France 2 0.00 0
Germany 1 1.00 1
Greece 3.5 1.46 1
Ireland 2 1.00 0
Italy 3 1.16 1
Netherlands 0 1.00 0
Spain 3 0.50 0
Sweden 2 2.00 0
United States 1 1.00 0
Average 2.0 1.00 0.2
Source: Armour and Cumming, forthcoming
Turning to restrictions on bankrupts, there is limited
73
comparable information across jurisdictions. In a
forthcoming paper, two academics attempt to develop
a comparative empirical assessment. In the paper, John
Armour and Douglas Cummings measure three factors
relating to bankruptcy law, which can be seen as variables
relating to how ‘debtor friendly’ a regime is:
Disabilities: These are restrictions on the debtor’s civil and •
economic rights after bankruptcy
Composition: This relates to the possibility of reaching an •
agreement with creditors as a means of terminating an
existing bankruptcy proceeding
Crimes: This is the criminal liability placed on bankruptcy •
proceedings
In their paper, they compare these factors across a selection
of countries. According to their research, the United
Kingdom rates near the centre for the disabilities imposed
on the debtor and the composition between debtor and
creditor. Table 17 contains the results.
70 Takes value 0 if there are no disabilities other than loss of power to deal with
assets in bankrupt estate; Takes the value 1 if there are civic disabilities (i.e.
loss of right to vote, hold elected of?ce, membership of professional groups);
Takes value 2 for economic disabilities (i.e. restrictions on obtaining credit, being
involved in the management of a company); Takes value 3 for interference with
mail and/or travel (i.e. prohibition on travel without consent, mail opened by
trustee); Takes value 4 if debtor may be incarcerated for non-payment of debts.
71 The variable takes a value between 0 and 2, and is the sum of [(1-v) + (1-c)],
where v is proportion of face value of existing creditors’ claims and c is proportion
of number of creditors, who must vote in favour to effect a compromise.
72 Takes value 0 if no criminal liability attached to bankrupts unless fraud is shown;
takes value 1 if criminal liability can be attached to bankrupts who have been
negligent
73 European Private Equity and Venture Capital Association (EVCA), ‘Bankruptcy
and Insolvency’, 2002. Armour, J., Cumming, D. (2005) ‘Bankruptcy Law and
Entrepreneurship’, University of Cambridge Centre for Business Research
Working Paper No. 300.
Table 16 Amount recovered when exemplar
business is closed, top twenty out of 127
countries when ranked for recovery rate and
other key economies, 2007*
Rank Country Recovery rate (%)
1 Japan 92.7
2 Singapore 91.3
3 Norway 91.1
4 Taiwan 89.5
5 Canada 89.3
6 Finland 89.1
7 Ireland 87.9
8 Belgium 86.4
9 Netherlands 86.3
10 United Kingdom 85.2
11 Korea 81.8
12 Australia 79.7
=12 Iceland 79.7
14 Hong Kong, China 78.9
15 Spain 77.6
16 United States 77.0
17 Sweden 75.7
18 Portugal 75.0
19 Austria 73.7
20 Denmark 70.5
28 Germany 53.1
32 France 48.0
49 Italy 29.7
Source: World Bank and cebr analysis, 2007
* Note: Recovery rates quoted are based on the outcome a speci?c
scenario developed and consistently applied by the World Bank. It is not
a measure of average recovery rates across each jurisdiction. Indeed, we
recognise that average recovery rates in the United Kingdom are much
lower than this speci?c example.
Unfortunately, the World Bank data relates to only business
insolvencies. We are also interested in creditors’ returns
when individuals become insolvent. However, little relevant
internationally comparative information or data was
available for this study.
The value of the insolvency industry
43
Table 18 Time
74
taken to close a business, years,
top twenty out of 127 countries when ranked by
length of time to close a business and other key
economies, 2007
Rank Country Time (years)
1 Ireland 0.4
2 Japan 0.6
3 Canada 0.8
=4 Singapore 0.8
=5 Taiwan, China 0.8
6 Belgium 0.9
=6 Finland 0.9
=6 Norway 0.9
9 United Kingdom 1.0
=9 Australia 1.0
=9 Belize 1.0
=9 Iceland 1.0
=9 Palau 1.0
=9 Solomon Islands 1.0
=9 Spain 1.0
16 Austria 1.1
=16 Hong Kong, China 1.1
=16 Jamaica 1.1
19 Germany 1.2
=19 Italy 1.2
26 United States 1.5
36 France 1.9
Source: World Bank, based on a survey of practicing insolvency lawyers and
veri?ed through a study of laws and regulations as well as public information
on bankruptcy systems and cebr analysis
74 Time captures the estimated duration required to complete a bankruptcy.
Information is collected on the sequence of bankruptcy proceedings and on
whether any procedures can be carried out simultaneously. Delays due to legal
derailment tactics that parties to the bankruptcy may use – in particular, the
extension of response period or appeals – are also considered.
Overall, the United Kingdom’s regime appears well
balanced when compared with other jurisdictions. It has,
by international standards, quite average restrictions on
bankrupts while maintaining a relatively high level of return
for creditors.
These conclusions are corroborated by the results of
our survey of United Kingdom insolvency professionals.
The survey revealed that 57 per cent of insolvency
professionals thought the balance between creditor and
debtor is a strength of the United Kingdom’s insolvency
regime. Only seven per cent felt it was a weakness, giving
a strong positive balance of +50 per cent.
4.2 The ef?ciency of the United Kingdom’s
insolvency industry
In this section, we examine the ef?ciency of the United
Kingdom’s insolvency industry. There are three factors that
are linked to the ef?ciency of the industry:
The time it takes to close a business •
The cost of closing a business •
Recovery rate i.e. the share of outstanding debts •
recovered by creditors after a business closes
We consider the ?rst two factors, in turn. The recovery
rate is covered in our analysis of the relationship between
creditor and debtor (see section 4.1).
When compared against other jurisdictions, the time to
close a business in the United Kingdom is relatively short
and the amount recovered by creditors after a business
closure is high. However, the overall cost of closing a
business is high when compared to other economies of a
similar size.
Considering the time it takes to close a business, the
World Bank data suggest that, of the 127 countries
analysed, the United Kingdom is ranked ninth quickest,
alongside six other countries. The estimated time taken
to close the World Bank’s exemplar business is one year.
This compares with to 0.4 years in Ireland and an overall
average across all countries surveyed of just over three
years.
The value of the insolvency industry
44
But there may be compelling reasons for the apparently
higher costs of the United Kingdom’s regime. For example,
insolvency practitioners operate in a regulated environment,
so there are costs of compliance to borne. It may also
be the case that the relatively higher costs in the United
Kingdom re?ect the remuneration needed for an industry that
performs well in other more important respects — such as
speed of closure. Moreover, the United Kingdom’s relatively
poor performance here may not impinge signi?cantly on
the insolvency sector’s contribution to the country’s overall
economy. Our analysis of internationally comparable data
suggests there is only a limited link between the average
costs of closure in a jurisdiction and that jurisdiction’s
prosperity (see section 3.4).
Our survey of insolvency professionals and expert
interviews support this ?nding. The survey revealed that
42 per cent of insolvency professionals perceived the
speed of the United Kingdom’s insolvency system to be
a bene?t: seventeen per cent perceived it as a weakness.
Similarly, 40 per cent of industry professionals reported that
the ef?ciency of the United Kingdom systems is a bene?t.
Eight per cent selected ef?ciency as a weakness, giving a
positive balance of +33 per cent.
Three of the seven experts interviewed mentioned dealing
with assets quickly and ef?ciently was a main bene?t, and
something the United Kingdom was particularly good
relative to its international peers. Less involvement with
the court was seen to quicken the processes, whilst being
more cost ef?cient. Having insolvency specialists and
trained judiciary were given as reasons for the increased
ef?ciency.
Importantly, in section 3.4 we ?nd the time to close a
business is closely linked with economic prosperity.
The second aspect of ef?ciency of the insolvency industry
that we consider is the cost of closing a business.
The United Kingdom does not fare as well when compared
to the rest of the world in terms of the cost of closing a
business. Here, we consider costs in a broad sense —
including all of?cial costs, such as court costs, independent
assessors, lawyers and accountants, and not just the fees
of insolvency practitioners. The United Kingdom is ranked
22nd by the World Bank with the typical cost estimated
to be six per cent of the value of their exemplar business’
estate. In six countries the cost is just one per cent of the
estate and in ?fteen countries the cost is four per cent.
75
Costs
76
(both for corporate and individual procedures)
were also highlighted as a weakness in expert interviews
and in our survey of insolvency practitioners. Only eight
per cent of respondents to our survey selected the cost of
procedures as a strength; 23 per cent considered costs
to be a weakness, giving a balance of -16 per cent. This
result is placed in context in Table 19.
75 To ensure consistent comparable data, these World Bank data relate to the
estimated cost of a closing the same ‘exemplar’ business across different
countries. However, this means that the World Bank estimate may not re?ect
the average costs across all closures in any one country. See section 6.5
76 The costs perceived by respondents are likely to include court costs,
professionals’ fees and the time burden.
The value of the insolvency industry
45
To address these concerns insolvency practitioners have
been involved in helping The Insolvency Service ?nalise
proposed changes to the individual voluntary arrangement
regime. Part of the proposals is to introduce Simple
Individual Voluntary Arrangements (SIVA) as an alternative
to Individual Voluntary Arrangements. According to the
government consultation paper
77
on the proposals:
‘A SIVA will be better suited to the needs
of indebted individuals whose affairs are
straightforward. This proposal would
also bene?t creditors as the simpli?cation
will reduce administrative costs and is
expected to generate better dividends.’
The amount recovered when a business is closed is also
a factor that gives a strong indication of how ef?cient the
insolvency industry is. As analysis is section 4.1 explains,
the United Kingdom is ranked tenth out of the 127 countries
analysed in the amount recovered when a business is
closed.
77 The Insolvency Service, ‘A consultation document on proposed changes to the
Individual Voluntary Arrangement (IVA) regime contained in the Insolvency Act
1986 and associated matters’, 2007
Table 19 Strengths and weaknesses of the
insolvency sector, share of respondents, United
Kingdom, 2007
Factor Number of
respondents
selecting ‘strength’
or ‘weakness’
Respondents
selecting factor as
a ‘strength’
Respondents
selecting factor as
a ‘weakness’
Balance
The balance between debtor and creditor 106 57% 7% +50%
The speed of the processes 97 42% 17% +25%
The ef?ciency of the industry 80 40% 8% +33%
The cost of the procedures 52 8% 23% -16%
Punishment against ‘culpable’ insolvents 83 21% 29% -8%
The structure of insolvency practitioner’s fees 53 6% 26% -20%
Source: cebr survey of R3 members, 2007
Insolvency practitioners’ fees are part of the cost burden.
Since 2006, some creditors have expressed concern over
fees relating to individual voluntary arrangements. The
majority of work for an individual voluntary arrangement
occurs at the beginning of the process, and the fees
re?ected this.
Creditors were concerned that the structure of payment
did not give insolvency practitioners an incentive to ensure
payment to the creditor throughout the full term of the
individual voluntary arrangement. It is impossible for an
insolvency practitioner to guarantee the future payment by
the debtor, as future circumstances cannot be known. In
addition, as insolvency practitioners attempt to maximise
payment for the creditor, the debtor is likely to have little
available income.
Insolvency professionals understand the rationale behind
the concern about the fee structure. Responses from our
survey revealed that 26 per cent of the insolvency industry
are concerned the structure of insolvency practitioners fees
were a weakness; only six per cent believe the structure is
a strength.
The value of the insolvency industry
46
Accountancy based employees are more likely to ?nd the
way the industry is regulated a weakness rather than a
strength. In contrast, there is a higher share of employees
from other types of ?rms that perceive the way the
industry is regulated as a strength. Nevertheless, although
the subject got a high share of responses, the balance
remains close to zero for workers in both accountancy and
insolvency specialist ?rms. Results can be seen in Table 21.
4.3 The regulation of the industry
In this section, we turn to the regulation and supervision of
the insolvency industry.
Issues relating to the regulation of the industry were
recurrent both in the responses to our survey of insolvency
professionals and in our discussions with industry leaders
and experts. However, there was no clear consensus over
whether the regulatory regime is a strength or a weakness
of the United Kingdom industry. This can be seen in a
selection of the survey results in Table 20.
Table 20 Strengths and weaknesses of
the insolvency sector, percentage of
respondents, 2007
Factor Number of
respondents
Percentage
‘strength’
Percentage
‘weakness’
Balance
The way the industry is regulated 105 33% 31% +2%
The ?exibility of the industry 92 51% 5% +46%
The consistency of the industry 83 19% 31% -13%
The transparency of the industry 94 30% 27% +2%
The ability to adapt to a changing environment 104 57% 5% +52%
The speed at which the regulators can adapt
to a changing environment
81 8% 41% -33%
Having 8 regulators (plus The Insolvency
Service)
115 1% 68% -67%
Having The Insolvency Service as a licenser,
regulator and dealing with cases themselves
89 12% 42% -30%
The amount the industry is regulated 91 19% 36% -17%
Source: cebr survey of R3 members, 2007
Our survey of insolvency professionals suggests that views
are divided over whether the regulatory regime is a strength
or weakness of the United Kingdom’s insolvency industry.
As Table 20 shows, a third (33 per cent) of respondents to
the survey reported that ‘the way the industry is regulated’
is a ‘strength’ of the regime. Slightly fewer (31 per cent)
said it is a ‘weakness’. The remaining 36 per cent reported
it is neither a strength nor a weakness; this a relatively low
number of neutral responses when compared to the other
issues covered by the survey. Out of the 21 issues within
the survey, it had the third highest number of responses.
The value of the insolvency industry
47
Speed of regulatory change. Over two-?fths (41 per •
cent) of respondents reported that ‘the speed at which
the regulators can adapt to a changing environment’ is
a weakness; eight per cent viewed it as a strength. Four
out of ten insolvency professionals (41 per cent) selected
the speed at which regulators can adapt to a changing
environment as a weakness, eight per cent selected it as
a strength. In contrast, 57 per cent reported the ability
of the industry to adapt to a changing environment as a
strength, only ?ve per cent selected it as a weakness. A
signi?cant factor behind the speed in which regulators
can adapt is coordinating the efforts of multiple parallel
regulators
Table 21 Balance of strengths and weaknesses
of the insolvency sector, percentage of
respondents, by type of company the
insolvency employee works, 2007
Type of company where insolvency employee works and balance selecting
strength rather than weakness
Factor Number of
respondents
Accountancy ?rm Insolvency
specialist ?rm
Law ?rm or
‘other’
The way the industry is regulated 105 -6% +6% +10%
The ?exibility of the industry 92 +59% +32% +32%
The consistency of the industry 83 -3% -23% -15%
The transparency of the industry 94 -14% +12% -4%
The ability to adapt to a changing environment 104 +12% -3% -4%
The speed at which the regulators can adapt to
a changing environment
81 -44% -33% -29%
Having 8 regulators (plus The Insolvency Service) 115 -70% -73% -67%
Having The Insolvency Service as a licenser,
regulator and dealing with cases themselves
89 -36% -36% -28%
The amount the industry is regulated 91 -25% -14% -11%
Number of respondents 146 132 54
Source: cebr survey of R3 members, 2007
Strong views were reported on certain aspects of the
regulatory regime:
Number of licensing bodies. Over two-thirds (68 •
per cent) of respondents reported that ‘having eight
regulators plus The Insolvency Service’ is a weakness;
only one per cent said it is a strength. The issue had the
highest number of responses. There was a concern that
the panoply of parallel regulators meant it was dif?cult
and time consuming to implement regulatory changes.
One expert we interviewed highlighted the dif?culty in
coordinating the efforts of the regulators, due to a lack
of time resource
Role of The Insolvency Service. Over two-?fths (42 •
per cent) of respondents reported that ‘having The
Insolvency Service as a licenser and regulator, and
dealing with cases themselves’ is a weakness. Twelve
per cent said it is a strength. Likewise, the majority of
the seven industry leaders and experts we interviewed
in depth ?agged the multiple roles of The Insolvency
Service as a concern
The value of the insolvency industry
48
Corporate versus individual responsibility. Three of the •
seven industry leaders and experts we interviewed in
depth raised the issue of legal responsibility. Prosecutions
can currently only be taken against the insolvency
practitioner and not the ?rm, which some fear creates
a problem with dealing with culpable companies
78
. This
is further exacerbated by the need for an insolvency
practice to have only one licensed practitioner regardless
of its size. There could be any number of people giving
advice, for instance over the telephone, and these
employees do not need to have the same level of training
78 Recently false selling of individual voluntary arrangements has became a
concern
As well as identifying potential problems with the regulatory
regime itself, the survey and interviews also provided
insight into certain characteristics of the industry that may
need to be addressed by regulators:
Consistency. Almost one third (31 per cent) of •
respondents to the survey reported that ‘the
consistency of the industry’ was a weakness.
Nineteen per cent cited it as a strength. A relatively
high balance of insolvency specialists (-23 per cent)
selected consistency as a weakness of the industry. In
comparison, a balance of -3 per cent of accountancy
?rm employees were concerned consistency is a
weakness
Transparency. Over one quarter (27 per cent) •
of respondents to the survey reported that ‘the
transparency of the industry’ was a weakness —
although slightly more (30 per cent) said it was a
strength. Practitioners based in insolvency specialist
?rms are more likely to report that transparency is a
strength (balance +12 per cent), whereas accountancy
based specialists are more likely to think transparency
is a weakness (-14 per cent). Transparency was
also a common theme in our depth interviews with
industry leaders and experts. Some cited the level
of communication with creditors and disclosure of
remuneration as examples of the industry’s lack of
transparency; while others voiced concerns about
a reported lack of openness in the regulation of the
industry
The value of the insolvency industry
49
5. The future of the insolvency industry
This chapter considers the future of the insolvency
industry. It examines likely future growth and threats and
opportunities to that growth.
The key ?ndings are:
1. Key to insolvency related growth over the next few years will be
macroeconomic trends. The current so-called ‘credit crunch’ and
slowdown in the economy are a catalyst for a tougher business
environment – putting pressure on the solvency of businesses and
individuals alike
2. However, there are other off-setting trends in the industry that look
likely to slow the rate of growth of insolvency businesses’ turnover in
the coming ?ve years. The rapid increase in the number of individual
voluntary arrangements will come to an end and levels are likely to
stabilise
3. Respondents to our survey expect turnover growth in the industry to
be at a slower pace over the next ?ve years. On average, turnover
is expected to grow by sixteen per cent in the next ?ve years in
comparison to twenty per cent over the last ?ve years
4. Our scenario analysis suggests individual insolvencies will remain above
100,000 a year after 2008. Individual insolvencies are likely to reach
between 120,000 and 140,000 by 2012. However, the risks are on the
upside, and according one scenario, insolvencies could rise to nearly
175,000 by 2012
5. Small changes in economic growth lead to signi?cant changes in
corporate failures. In our base scenario, corporate insolvencies rise
moderately; reaching a high of 18,000 in 2010 from 14,600 in 2008.
After the economy recovers, failures are expected to come down to
approximately 17,700 in 2012
6. With growth in international trade and emerging economies, the number
and importance of multi-national companies has expanded. Meanwhile,
businesses are becomingly increasingly footloose internationally. In this
context, there is now greater competition between jurisdictions to attract
locating and relocating businesses, as well as capital. In addition, this
is likely to move the focus of the insolvency industry further towards
turnaround rather than formal insolvency
7. Our research has highlighted areas that the industry and its regulators
may need to address to maximise all future opportunities. These areas
are: the responsiveness of the regulatory regime; consistency; the role of
The Insolvency Service; the cost of insolvency; and liability
The value of the insolvency industry
50
This so-called ‘credit crunch’ will exacerbate the matter,
and is likely to have both a short term and long term effect
(which we discuss in turn).
In the short term, higher credit costs are likely to force more
businesses and individuals into insolvency. The number
of new and renewed mortgages will also fall as house
prices fail to grow and the number of housing transaction
retreats. This is likely to increase the number of business
insolvencies, particularly for small independent ?nancial
advisors and estate agents.
The manufacturing sector may also be heavily affected.
The growth over the past four years in private equity, hedge
funds, mergers and acquisitions has been an important
boost for the sector. Activity in all these credit orientated
areas has slowed considerably.
Slower growth in consumers’ expenditure will cut
businesses’ pro?ts, putting upward pressure on business
failures across sectors but especially in retail.
Respondents from our survey recognised these factors
would be a source of growth in the insolvency industry,
as shown in Table 22. Of the insolvency professionals, 77
per cent indicated that changes in the interest rate, cost of
obtaining credit and the availability of credit would facilitate
growth in their industry; only ten per cent suggested it would
be a threat to growth. The balance of +67 per cent was the
highest of all issues considered. Changing levels of debt
were also seen to represent a potential driver of growth in
the insolvency industry by respondents, with 63 per cent
selecting the issue as an opportunity and six per cent
selecting it as a threat. The balance of +57 per cent was the
second highest of the issues considered.
In this chapter, we consider the future of the insolvency
industry, in particular, its likely growth, opportunities and
threats.
We ?rst discuss the main drivers of the insolvency
industry. Second, we consider the prospects for the
economic contribution of the insolvency industry. Third,
we analyse the prospects for individual insolvency. Fourth,
the prospects for corporate insolvency are examined in
more detail. In the ?fth section, we consider the long term
challenge of globalisation. The chapter concludes with
suggested areas of action.
5.1 The main drivers of growth in the
insolvency industry
In this section, we discuss the main drivers of the
insolvency industry over the next ?ve years.
Key to insolvency related growth over the next few years
will be a slowdown in the economy. The so-called ‘credit
crunch’, and the subsequent slowdown in the economy
predicted by many commentators, including us, will be
a catalyst for a tougher business environment – putting
pressure on the solvency of businesses and individuals
alike. However, there are other off-setting trends in the
industry that look likely to slow the rate of growth of
insolvency businesses’ turnover in the coming ?ve years.
We ?rst consider likely future economic growth and
how this may affect the demand for insolvency services.
Second, we consider how changes in the industry may
affect its growth.
A general economic slowdown was anticipated even
before the ?nancial turmoil in the credit markets, caused
by the fallout from the United States sub-prime mortgage
market.
The latest cebr forecasts are that United Kingdom real
gross domestic product growth will slow from 3.1 per cent
in 2007 to under two per cent in 2008. However, the build
up to the Olympics and recoveries in the United States
economy and in the United Kingdom housing market will
support the United Kingdom economy in 2009 and 2010.
As insolvencies tend to follow the economy with a lag of
one year, we expect that the main effect of the economy’s
slowdown will be felt by the insolvency sector in 2009
onwards.
The value of the insolvency industry
51
5.2 Prospects for the economic contribution
of the insolvency industry
In this section we explore the likely future growth of turnover
of the insolvency industry. We use evidence from our survey
of insolvency practitioners.
Growth in the insolvency industry has been strong over
the last ?ve years. Our survey of insolvency professionals
revealed that 29 per cent of respondents said insolvency
related turnover had increased by 50 per cent or more. A
further 43 per cent of respondents said turnover growth had
been between ten per cent and 49 per cent. Only six per
cent reported turnover had fallen, as shown in Figure 34.
The main driver for the rise in turnover has been an increase
in personal insolvencies, especially individual voluntary
arrangements (see chapter 2).
Table 22 Opportunities and threats to the
sector, percentage of respondents, United
Kingdom, 2007
Factor Number of
respondents
Percentage
‘opportunity’
Percentage ‘threat’ Balance
Changing levels of debt 114 63% 6% +57%
Changes in the interest rate / cost of obtaining
credit / availability of credit
144 77% 10% +67%
Changes in the numbers and value of private
equity deals, forms of structured debt and other
‘new’/’growing’ forms of debt
82 38% 11% +27%
Competition and the changing structure of the
sector - with changing size and numbers of
insolvency practices
86 39% 14% +24%
The strength of the economy 103 37% 25% +11%
Source: cebr survey of R3 members, 2007
In the longer term (after say four years), any tightening
of lending standards resulting from the current credit
crunch is likely to reduce the number of insolvencies. More
cautious creditors, a re-pricing of risk and fewer loans to
the sub-prime market will lead to more subdued growth
in consumer and business debt. This could reduce the
number of people getting in ?nancial dif?culty.
The rapid increase in the number of individual voluntary
arrangements will come to an end and levels are likely to
stabilise. However, growth in advice and rescue services
will support the insolvency industry. With continued
globalisation among businesses, there will be new
growth for insolvency professionals in serving the needs
of multinational and internationally footloose companies.
But, there may stronger competition between jurisdictions
and from insolvency ?rms abroad. This will place further
demands on domestic regulation and supervision of the
industry to ensure that the United Kingdom insolvency
profession keeps up and even ahead of international
competitors.
The value of the insolvency industry
52
Figure 34 Growth in insolvency-related turnover
over last ?ve years as reported by insolvency
professionals, United Kingdom
Source: cebr survey of R3 members, 2007, with standard error bars
As shown in Figure 35, respondents to our survey expect
turnover growth in the industry to be at a slower pace
over the next ?ve years. On average, turnover is expected
to grow by sixteen per cent in the next ?ve years in
comparison to twenty per cent over the last ?ve years.
Twelve per cent of people in the industry are expecting
insolvency related turnover to grow by 50 per cent or more
but nine per cent expect turnover to fall.
Figure 35 Expected growth in insolvency-related
turnover over next ?ve years as reported by
insolvency professionals, United Kingdom
Source: cebr survey of R3 members, 2007
We now compare the expected turnover in by the type of
?rm an insolvency professional is based.
Our survey results indicate that the average turnover
growth expected in the next ?ve years will be sixteen per
cent in both accountancy ?rms
79
and insolvency specialist
?rms
80
. Insolvency practitioners based in law ?rms
81
are
slightly more bullish, with an average expected turnover of
eighteen per cent. Of the insolvency practitioners based
in ?rms self-classi?ed as ‘other
82
’ the average expected
turnover growth is seventeen per cent.
5.3 Prospects for individual insolvencies
In this section, we discuss factors speci?c to the future
growth of individual insolvency. We then use this analysis
and our expectations of growth in the United Kingdom
economy to forecast the number of individual insolvencies.
The number of personal insolvencies began to rise
sharply in 2004 (see section 2.4). This was mainly due to
increasing numbers of individual voluntary arrangements.
However, after this rise in the number of individual voluntary
arrangement proposals, creditors began to reassess their
criteria for acceptance of proposals. This has led to an
increase in refusal of proposals
83
. In turn, the number of
individual voluntary arrangements began to retreat, as is
evident in ?gures for the last quarter of 2006 and the ?rst
three quarters of 2007, as seen in Figure 36.
79 Based on responses from 73 insolvency professionals based in accountancy
?rms
80 Based on responses from 66 insolvency professionals based in insolvency
specialist ?rms
81 Based on responses from fourteen insolvency professionals based in law
?rms
82 Based on responses from thirteen insolvency professionals based in ‘other’
?rms
83 McCambridge Duffy, Debt Resolution Forum, 2007; interviews with creditors
and insolvency industry experts, 2007
0%
5%
10%
15%
20%
25%
30%
35%
F
a
l
l
e
n
b
y
5
0
%
o
r
m
o
r
e
F
a
l
l
e
n
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
F
a
l
l
e
n
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
F
a
l
l
e
n
b
e
t
w
e
e
n
1
%
a
n
d
9
%
N
o
t
c
h
a
n
g
e
d
G
r
o
w
n
b
e
t
w
e
e
n
1
%
a
n
d
9
%
G
r
o
w
n
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
G
r
o
w
n
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
G
r
o
w
n
b
y
5
0
%
o
r
m
o
r
e
0%
5%
10%
15%
20%
25%
30%
35%
40%
F
a
l
l
b
y
5
0
%
o
r
m
o
r
e
F
a
l
l
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
F
a
l
l
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
F
a
l
l
b
e
t
w
e
e
n
1
%
a
n
d
9
%
N
o
c
h
a
n
g
e
G
r
o
w
b
e
t
w
e
e
n
1
%
a
n
d
9
%
G
r
o
w
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
G
r
o
w
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
G
r
o
w
b
y
5
0
%
o
r
m
o
r
e
The value of the insolvency industry
53
Figure 37 Number of personal bankruptcies,
thousand, England and Wales, 2005 - 2007
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
We now explore the likely future path of personal
insolvencies – individual voluntary arrangements and
personal bankruptcies. We have built an econometric
model
84
to quantify the impact of the drivers of total personal
bankruptcies.
The model
85
supported our view that personal insolvencies
have been driven by two main factors:
The economy •
Structural change •
We consider these in turn.
To estimate the effect of the United Kingdom economy we
used growth in United Kingdom gross domestic product
(GDP). The results of our modelling show, a one percentage
point fall in United Kingdom gross domestic product leads
to a rise in personal insolvencies of approximately 1,700 in
the year following.
Our modelling has also attempted to take account of recent
structural changes in the market. In particular, a heightened
awareness of insolvency options and a change in creditors’
propensity towards individual voluntary arrangements have
led to adjustments in the market. We use a dummy variable
to estimate the effect of these structural changes.
84 We used ordinary least squares regression to determine which factors had the
strongest causal relationship with total personal insolvencies. The methodology
is in section 6.6.
85 For more technical details on the model see section 6.6
Figure 36 Number of individual voluntary
arrangements, thousand, England and Wales,
2005 - 2007
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
Higher rejection of individual voluntary arrangements may
increase bankruptcies in future periods – as some of those
who have been refused an IVA will become bankrupt.
Others who are unable to get agreement on an IVA may
utilise a debt management plan instead, a route that
does not require the services of a licensed insolvency
practitioner.
Recent data show bankruptcies have not yet begun to
increase, as shown in Figure 37. However, a high rejection
rate could be a larger problem in the next few years when
personal ?nances are tightened.
0
2
4
6
8
10
12
14
2
0
0
5
Q
1
2
0
0
5
Q
2
2
0
0
5
Q
3
2
0
0
5
Q
4
2
0
0
6
Q
1
2
0
0
6
Q
2
2
0
0
6
Q
3
2
0
0
6
Q
4
2
0
0
7
Q
1
2
0
0
7
Q
2
2
0
0
7
Q
3
0
2
4
6
8
10
12
14
16
18
20
2
0
0
5
Q
1
2
0
0
5
Q
2
2
0
0
5
Q
3
2
0
0
5
Q
4
2
0
0
6
Q
1
2
0
0
6
Q
2
2
0
0
6
Q
3
2
0
0
6
Q
4
2
0
0
7
Q
1
2
0
0
7
Q
2
2
0
0
7
Q
3
The value of the insolvency industry
54
Figure 38 Gross domestic product growth, actual
and forecast, United Kingdom, 2000-2012
Source: Of?ce of National Statistics and cebr forecasts, 2007
The impact of changes to legislation and market reactions
are also unclear. In particular, the market may be affected
by:
continued increasing knowledge of the public of •
individual voluntary arrangements; greater awareness
of individual voluntary arrangements and a fall in the
stigma associated with them, could continue to increase
insolvencies
rejection of individual voluntary arrangement proposals; •
the recent increase in rejection of the proposals could
continue, this may keep growth in individual voluntary
arrangements low
higher rejection of individual voluntary arrangements, •
if this continues it could increase the number of
bankruptcies
the introduction of simple involuntary individual voluntary •
arrangements (commonly known as SIVAs), a high
demand for this new type of insolvency procedure could
increase the number of insolvencies
We now discuss our four scenarios, summarised in
Table 23.
The model con?rms our view that the new market to
channel individual voluntary arrangements led to an
exponential increase in individual
voluntary arrangement ?lings from
2002. Using the model, we estimate
as a direct result of market effects,
there have been approximately 3,900
compounding additional personal
insolvencies in every year since 2002.
In other words, in 2002 there were
an additional 3,900 insolvencies, in
2003 there were 7,900
86
additional
insolvencies, in 2004 there was
an additional 11,800
87
personal
insolvencies, etc. as a result of market
reactions.
We use our model to assess the likely
future path of personal insolvencies.
We analyse four scenarios
88
to better
understand the impact of possible
future events.
Our four scenarios are based on
varying the two main drivers of personal
insolvency: the economy and market
reactions.
Although cebr have been forecasting the economy on
a quarterly basis since 1993
89
the long-term impact
of the credit crunch is unclear and it is important to
understand how variances in our estimates effect predicted
insolvencies. Our latest forecasts are that United Kingdom
gross domestic product will grow by 1.8 per cent in 2008
but will rebound, reaching 2.6 per cent in 2010 and 3.0 per
cent in 2012, as seen in Figure 38.
86 Figures may not sum due to rounding
87 Figures may not sum due to rounding
88 The methodology is in section 6.6
89 Our forecasts are published by the treasury
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
UK GDP growth Predicted GDP growth
The value of the insolvency industry
55
Our recession scenario assumes that United Kingdom gross
domestic product growth will be two percentage points
lower than our base scenario in every year after 2007. In this
scenario, gross domestic product in the United Kingdom
falls by 0.2 per cent in 2008 and output fails to increase
in 2009. We retain the assumption in our base scenario
that creditors will continue to reject individual voluntary
arrangements and that the introduction of SIVAs will have
limited impact on total insolvencies. In this scenario the
number of individual insolvencies rises to 119,000 in 2010
and 127,300 in 2012.
The dam effect scenario assumes the same economic
growth as in the base scenario. In this scenario we assume
that bankruptcies will increase in response to creditors
increasing the number of individual voluntary arrangements
they reject. For illustrative purposes, we have assumed
twenty per cent of refused individual voluntary arrangement
proposals that have been rejected become bankrupt. In
2009 individual insolvencies reach 118,300 and in 2012
bankruptcies reach 133,600. It is interesting to note that
our dam effect has more of an in?uence on individual
insolvencies than reducing economic growth by two
percentage points.
Table 23 Assumptions for possible
future scenarios
Scenario Economic environment Market environment
Base In line with latest cebr forecasts Creditors current rejection rate of IVA proposals continues, limited impact
on bankruptcies.
SIVAs have limited impact
Recession UK annual GDP growth two
percentage points lower than cebr
forecasts
Creditors current rejection rate of IVA proposals continues, limited impact
on bankruptcies.
SIVAs have limited impact
Dam effect In line with latest cebr forecasts Bankruptcies increase in response to creditors increasing the number of
individual voluntary arrangements they reject
Strong reaction to
introduction of SIVAs
In line with latest cebr forecasts Introduction of SIVAs creates a market response similar to that of the
response of increased awareness of individual voluntary arrangements
Source: cebr survey of R3 members, 2007
For our base scenario, we assume United Kingdom
economy grows inline with the latest cebr forecasts. We
also assume creditors will continue to reject individual
voluntary arrangements and this will have only a limited
impact on the number of people going into bankruptcy.
Finally, we assume that the introduction of simple
involuntary individual voluntary arrangements will have only
a limited impact on total insolvencies.
In this scenario, individual insolvencies rise from 108,000 in
2008 to 112,300 in 2010. The number is likely to remain at
a similar level in 2011 and 2012 as the economy recovers.
Our estimates can be seen in Figure 39.
Figure 39 Number of personal insolvencies,
Actual and predicted in base scenario,
thousand, England and Wales, 2000-2012
Source: Insolvency service and cebr forecasts, base scenario, 2007
0
20
40
60
80
100
120
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Personal insolvencies Central forecast
The value of the insolvency industry
56
5.4 Prospects for corporate failures
In this section we forecast the number of corporate failures.
We examine two scenarios and their impact on business
failures.
Unlike personal insolvencies where recent trends have
been dominated by structural changes relating to individual
voluntary arrangements, there have been few signi?cant
speci?c industry factors affecting the number of business
failures. Instead, company insolvencies have followed a
pattern that broadly re?ects the underlying performance
of the United Kingdom economy. We built an econometric
model
90
to analyse this relationship in more detail and
quantify the impact of a changing economic environment on
business insolvencies.
The model con?rmed our view that corporate insolvencies
are highly sensitive to growth in the United Kingdom
economy one year previously
91
. The results of the modelling
suggest that a one percentage point reduction in gross
domestic product leads to an increase of 2,500 business
insolvencies one year following.
We now use the model to explore the future path of
corporate insolvencies. We analyse two scenarios:
Base scenario •
Recession •
The scenarios are summarised in Table 24. The results of
the modeling are given in Figure 41.
Table 24 Assumptions for possible future
scenarios
Scenario Economic environment
Base UK annual GDP growth in line with latest cebr
forecasts
Recession UK annual GDP growth two percentage points
lower than cebr forecasts
Source: cebr survey of R3 members, 2007
As in our base scenario for personal insolvencies, in our
base scenario for corporate insolvencies, we assume the
United Kingdom’s economy will grow according to cebr’s
latest economic forecasts. Gross domestic product will
increase by 1.8 per cent in 2008, rising to 3.0 per cent in
2012, as in Figure 38.
90 We used ordinary least squares regression to determine which factors had the
strongest causal relationship with total personal insolvencies. The methodology
is in section 6.6
91 For more technical details on the model see section 6.6
In our strong reaction to SIVAs scenario, we assume
that the introduction of SIVAs creates a market response
similar to that resulting from the increased awareness of
individual voluntary arrangements. We assume the same
economic growth as in our base scenario. This has the
highest growth in insolvencies out of the four scenarios
examined. The number of individual insolvencies reaches
136,000 in 2010 and 173,100 in 2011. However, it is
unlikely this level of growth is sustainable and it is doubtful
the market reaction to SIVAs will be the same as that which
followed the increased awareness of individual voluntary
arrangements.
Figure 40 shows all of the different scenarios modelled.
Figure 40 Scenarios for the number of personal
insolvencies, thousand, England and Wales,
2000- 2012
Source: Insolvency service and cebr analysis, 2007
The scenario analysis suggests individual insolvencies
will remain above 100,000 a year after 2008. In our view,
combining our economic forecasting expertise with the
views gathered from the industry interviews and results
from our survey of insolvency professionals, the most
likely outcome will be around our base and ‘dam effect’
scenarios. This implies individual insolvencies would reach
between 120,000 and 140,000 by 2012. However, the
risks are on the upside, and according to our ‘strong
reaction to SIVAs scenario’, insolvencies could rise to
nearly 175,000 by 2012.
0
20
40
60
80
100
120
140
160
180
200
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Individual insolvencies Base scenario Recession
Strong reaction to SIVAs Dam effect
The value of the insolvency industry
57
This scenario analysis also focuses on the formal corporate
insolvency. However, the main change in the corporate
sector over the next few years is likely to be a move towards
more informal process rather than formal insolvency. This
point was discussed in the majority of our seven expert
interviews and is part of the current trend noted by the
experts. Further evidence that supports this is that the
average size of a company has grown and larger companies
are more likely to be rescued rather than put through formal
insolvency proceedings (see section 3.3). We expect the
trend towards larger company sizes and rescue to continue.
5.5 The long term challenge of globalisation
In this section, we discuss the longer term challenge
of globalisation. The trends in personal and corporate
insolvencies discussed in sections 5.3 and 5.4 are based on
the domestic United Kingdom market. However, there is an
opportunity for additional growth from international sources.
With growth in international trade and emerging economies,
the number and importance of multi-national companies
has expanded. Meanwhile, businesses are becomingly
increasingly footloose internationally. In this context, there
is now greater competition between jurisdictions to attract
locating and relocating businesses, as well as capital.
The insolvency profession may bene?t from this, as it has
a potentially larger market — including both domestic
businesses and the internationally footloose. Growth in
the international trade of ?nancial and businesses services
suggests that this trend is happening in other sectors similar
to the insolvency profession. Total world trade accounts for
28 per cent of the global economy
93
.
The European Union has proved more competitive in terms
of service exports than most other large economies. Its
export values have grown by twelve per cent per annum
against a background of ten per cent average annual growth
worldwide. Table 25 presents World Trade Organisation data
on the value of world exports by sector. Exports in insurance
and ?nancial services were worth €47 billion and €112
billion respectively in 2005 and account for two per cent of
total world exports. Exports in services totalled €1.9 trillion
in 2005, of the service sector exports, 78 per cent are in
transportation, travel and other business services.
93 World Trade Organisation, International Trade Statistics 2006. Exports include
Intra-EU trade; ?gures may not sum due to rounding.
Using this scenario, our model predicts formal corporate
insolvencies will rise moderately; reaching a high of 18,000
in 2010 from 14,600 in 2008. After the economy recovers,
failures are expected to come down to approximately
17,700 in 2012. Our estimates can be seen in Figure 41.
In our recession scenario, we analyse the impact of a
recession on corporate failures. The model uses United
Kingdom gross domestic product growth estimates two
percentage points lower than our central scenario in every
year from 2008, inclusive. Gross domestic product in the
United Kingdom falls by 0.2 per cent in 2008 and output
fails to increase in 2009. Between 2010 and 2012 the
economy fails to grow by more than a one per cent per
annum. In this scenario the number of corporate failures
rises to 27,900 in 2010 and 37,400 in 2012. However,
such a sustained period of low economic growth has only
occurred once since 1949 and is unlikely to occur in the
foreseeable future.
Figure 41 Number of business failures, actual
and predicted, thousand (RHS), England and
Wales, and Gross domestic product growth,
United Kingdom, 2000-2012
Source: Insolvency Service, Of?ce of National Statistics and cebr
forecasts, 2007
The scenario analysis highlights the importance of
economic growth to businesses and the insolvency
industry. Small changes in economic growth lead to
signi?cant differences in corporate failures
92
.
92 It should also be noted that our model is a simpli?ed abstract of a multivariable
world; it contains only two independent variables and, as such, may be over-
sensitive to changes in gross domestic product. More details on the model are
in section 6.6
0
5
10
15
20
25
30
35
40
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Total company failures (LHS) Base scenario Recession
The value of the insolvency industry
58
How the United Kingdom compares internationally will be
important — as national jurisdictions compete with one
another as hosts to increasingly footloose global companies.
As the ability to choose the location for a base increases,
debtors, creditors and insolvency practitioners will locate
where the insolvency regime best suits their needs.
Parallel to business globalisation, further coordination
and integration among European Union member states is
likely. This has its bene?ts: the United Kingdom insolvency
industry is already bene?ting from access to a wider pool
of professionals from across the continent — while there is
progress towards a single market in services. However, this
also brings additional pressures on the domestic regime —
especially in ensuring consistent regulation and licensing
of domestic and European practitioners — and uncertainty
over the future locus of regulations: Brussels or London?
Nearly a quarter (24 per cent) of respondents to our survey
reported European regulations were a threat; only thirteen
per cent saw opportunity.
Table 25 World exports, €billion, 2005
World exports Exports, €billion
Total world exports 10,100
Of which:
Merchandise 8,200
Services 1,900
Of which: Travel 550
Transportation 460
Royalties and license fees 131
Financial services 112
Computer and information services 75
Insurance services 47
Communication services 37
Construction services 37
Personal, cultural and recreational services 28
Other business services 467
Source: World Trade Organisation, International Trade Statistics 2006.
Exports include Intra-EU trade; ?gures may not sum due to rounding.
The United Kingdom is well placed to take advantage
of this growth. London is already a centre for ?nance
and business. Our survey of insolvency professionals
revealed that 26 per cent of respondents felt globalisation
represented an opportunity. However, a further eight per
cent perceived it as a threat, leaving a balance of +18 per
cent. Survey results are in Table 26.
There are several important implications of globalisation on
the insolvency industry:
There will be more larger businesses in ?nancial dif?culty •
There will be further consolidation across all sectors, •
including the insolvency industry
How the United Kingdom is perceived internationally will •
have more of an importance for the insolvency industry
The European Union will have more of an in?uence on •
the insolvency industry
Larger and more complex entities require different
services from the insolvency profession than their smaller
counterparts. As the average size of a business grows,
in the future it is likely that larger businesses will end up
in ?nancial dif?culty. In general, there is a greater role for
informal advice and recovery measures, and less emphasis
on using formal insolvency procedures.
There will be further industry consolidation in the insolvency
industry as ?rms acquire the economies of scale necessary
to service global clients. But larger ?rms will place further
pressure on the domestic regulatory and licensing regime
which is focused on the individual insolvency practitioners,
rather than ?rms.
The value of the insolvency industry
59
future contribution and growth prospects of the industry are to
be maximised.
We now consider the ?ve areas where the industry could
improve.
First, improving the responsiveness of the regulatory regime is an
area for consideration. The questionnaire responses indicated
a stark contrast of views between the ability of the industry
to respond to a changing regulatory environment and the
speed at which regulators adapt to a change in the regulatory
environment. Four out of ten insolvency professionals (41 per
cent) selected the speed at which regulators can adapt to a
changing environment as a weakness, eight per cent selected it
as a strength. In contrast, 57 per cent reported the ability of the
industry to adapt to a changing environment as a strength, only
?ve per cent selected it as a weakness.
A signi?cant factor behind the speed in which regulators can
adapt is coordinating the efforts of multiple parallel regulators.
Our survey of insolvency practitioners revealed that having
multiple regulators is their biggest concern: 68 per cent
of respondents selected having eight regulators plus The
Insolvency Service as a weakness of the sector; only one per
cent selected it as a strength. Expert interviews revealed that
a lack of resource means it is dif?cult to implement changes
quickly.
Different degrees of responsiveness are critical as the industry
and its regulator face up to some important changes in the
next few years. These changes include:
growth in international trade and emerging economies. •
The number and importance of multi-national companies
has expanded. Meanwhile, businesses are becomingly
increasingly footloose internationally. In this context, there
is now greater competition between jurisdictions to attract
locating and relocating businesses, as well as capital. In
addition, this is likely to move the focus of the insolvency
industry further towards turnaround rather than formal
insolvency
Table 26 Threats and opportunities to the
sector, percentage of respondents, United
Kingdom, 2007
Factor Number of
respondents
Percentage
‘opportunity’
Percentage
‘threat’
Balance
Globalisation 56 26% 8% +18%
EU regulations 61 13% 24% -11%
The speed at which the regulators can adapt to a
changing environment
71 8% 34% -24%
The ability to adapt to a changing environment 62 31% 6% +25%
Source: cebr survey of R3 members, 2007
5.6 Study key conclusions
In this section, we summarise the key conclusions of
our study.
The industry provides a signi?cant contribution to employment
and gross domestic product to the United Kingdom
economy. There are an estimated 12,700 jobs employed
directly in the industry; its gross value added is an estimated
£780 million per annum, equivalent to 0.08 per cent of the
national economy (as seen in section 3.1). The insolvency
industry’s purchases from suppliers, and the spending by its
employees, accounts for a further £417 million of national
output (as seen in section 3.2).
In addition, the industry provides support for both individuals
and corporations in ?nancial dif?culty. Based on our survey
of insolvency professionals, we estimate the industry is
responsible for saving 910,000 jobs in 2006. The businesses
which are saved are estimated to contribute £132 billion in
turnover. These results are in section 3.3.
Importantly, the industry creates an environment that is
conducive for entrepreneurship and appropriate risk taking.
The United Kingdom regime performs well by having both
an ef?cient insolvency regime and one where the debtors’
and creditors’ interests are well balanced. In an international
comparison of 127 countries, the United Kingdom is ranked
tenth largest in terms of the amount recovered by creditors
when a business is closed and joint ninth fastest for the time it
takes to close a business. Our analysis suggests that regimes
that perform well on these measures of creditor protection
and insolvency ef?ciency are also economically vibrant; they
are more prosperous, invest more and have faster rates of
economic growth.
5.7 Areas for review and possible action
Although the thrust of our research has been to identify and
quantify the contribution made by the insolvency industry to
the United Kingdom economy, it has highlighted areas that
the industry and its regulators may need to address if the
The value of the insolvency industry
60
In section 4.2 we identify that the cost of closing a business in
the United Kingdom is relatively poor in comparison to other
international jurisdiction – the United Kingdom was ranked
22nd with the average cost estimated to be six per cent of
the value of the estate. Our survey of insolvency professionals
revealed that 23 per cent of insolvency professionals thought
the cost of the procedures was a weakness of the industry,
while only eight per cent selected it as a strength.
Two important points of clari?cation need to be made regarding
this issue. First, the cost of closing a business is not the same
as insolvency practitioners’ fees. Rather, this represents just
one element in the cost of closing the business which also
includes court costs, fees of independent assessors, lawyers
and accountants. Second, the analysis of the World Bank
data suggested that the cost of closing a business was less
important in promoting economic activity and growth than
a number of other aspects of the insolvency industry i.e. the
amount recovered when a business is closed and the time
taken to close a business – all of which the United Kingdom
performs well on. Nonetheless, the analysis does suggest that
the cost of business closure is worthy of further investigation.
The ?rst stage of any such action would be to identify the
relative importance of different aspects of the cost of closing
a business and how these compare with jurisdictions where
costs appear to be lower. This will help identify the extent to
which costs in the United Kingdom are ‘industry’ costs or,
for instance, costs (inappropriately) incurred by the legal and
regulatory framework. Action could then be targeted at the
areas where costs appear high by international standards.
Fifth, liability was an issue raised during our research. The
report identi?ed how the insolvency industry is already
polarised and, in particular, the growth of large insolvency ?rms.
These trends will only be enhanced by the further impacts of
globalisation on the industry, as discussed in section 5.5. In an
environment in which insolvency advice and support is being
administered by ?rms with in excess of ?ve thousand people,
regulatory framework which is focused on individual insolvency
practitioners may no longer be ?t for purpose.
possible stronger competition between jurisdictions •
and from insolvency ?rms abroad. This will place further
demands on domestic regulation and supervision of the
industry to ensure that the United Kingdom insolvency
profession keeps up and even ahead of international
competitors
the so-called ‘credit crunch’, and the subsequent •
slowdown in the economy. This will be a catalyst for a
tougher business environment – putting pressure on the
solvency of businesses and individuals alike
The precise way in which the regulatory framework should
evolve to deal with these inter-related challenges is beyond
the scope of this report. However, we note again the
problems potentially caused by a multiplicity of parallel
regulators: meaning that not just one regulator needs to be
responsive to the changing environment but instead all nine.
Second, the consistency of the industry was highlighted
as a weakness. Again the survey identi?ed that a lack
of consistency within the industry represented a key
weakness: 31 per cent of respondents felt the industry
lacked consistency, nineteen per cent selected it as a
strength. The industry experts that we interviewed said
that although the regulation was consistent, and there was
much communication across regulators, the structure of
regulators can give the impression that that the industry lacks
a consistency.
Third, many of the experts we interviewed felt that the multiple
roles of The Insolvency Service led to possible con?icts of
interest. Our survey of insolvency practitioners revealed that
almost half the industry (42 per cent) thought the multiple
roles was a weakness. Just ?ve per cent selected it as a
strength. Industry experts cited several problems, including:
being a licenser and also regulating other licensees leads •
to problems with transparency as it is not clear who
regulates The Insolvency Service
dealing with cases themselves may affect The Insolvency •
Service’s incentives. Although some felt there was a role
for the industry in dealing with some cases that are not
suitable for some insolvency practitioners – for instance
when there has been illegalities – interviewees thought that
there should be a clearer line as to what was within The
Insolvency Service’s jurisdiction and what was not
there was concern that the insolvency practitioners •
licensed by The Insolvency Service were not as fully
monitored
Fourth, the cost of insolvency was highlighted as a relative
weakness of the United Kingdom’s regime in our international
comparative analysis, our interviews with industry experts and
in the responses to our internet survey of R3 members.
The value of the insolvency industry
61
6. Appendix: Explanatory notes
This appendix provides further detailed illustration and
explanation of some of the issues, calculations and
analyses reported in the main chapters of this report.
We provide nine notes:
Analysing the survey results •
Determining the employment in the insolvency industry •
Measuring the indirect economic contribution of the •
insolvency industry
Calculating the number of jobs saved by the industry •
Analysing the wider economic contribution of the •
insolvency industry
Forecasting individual and corporate insolvencies •
The industry experts we interviewed •
Bibliography of literature used in the compiling of this report •
The survey of the insolvency professionals and their •
responses
The value of the insolvency industry
62
Given a population size, statistical con?dence in survey
results depend on two main factors:
The sample size, • n
Variance of responses, • ?
2
The standard error takes into account these factors. We
state the standard error in order to give a level of accuracy
to results. The standard error is calculated as:
;
Where:
S.E • = the standard error
? • = standard deviation
? •
2
= variance
n • = sample size
In our ?gures that report survey results we include the
standard error as a measure of accuracy. The following
equation is used:
;
Where:
S.E • = the standard error
s • = series number
i • = point number in series s
m • = number of series for point y in chart
n • = number of points in each series
y •
is
= data value of series s and the ith point
n •
y
= total number of data values in all series
6.1 Analysing the survey results
In this section we discuss the details of the survey
we conducted of the members of R3. We explain the
weighting system we used and the accuracy of the results.
The survey results are used throughout the report.
We sent an email survey to all members of R3. A copy of
the survey and its results is in Section 6.9. We had a total
of 169 responses:
109 classi?ed themselves as insolvency practitioners •
One insolvency regulator responded •
Nineteen respondents classi?ed themselves as a •
turnaround professional
Fifteen classi?ed themselves as a student or in training •
22 respondents classi?ed themselves as none of •
above, but declared they worked in insolvency or in an
insolvency related industry
Two of the respondents were either retired or inactive •
in insolvency sector. If this option was selected the
respondent was not asked any further questions
One person declared that they had nothing to do with •
insolvency or an insolvency related business. This
person was not asked any further questions
We now discuss the accuracy of our survey results.
There are 1774 insolvency practitioners licensed in the
United Kingdom. The number of responses from people
who classi?ed themselves as insolvency practitioners
was 109. Therefore 6.14 per cent of all United Kingdom
insolvency practitioners responded. This can be seen
as a minimum response rate because a share of those
classi?ed as ‘turnaround professionals’ are likely to be
licensed insolvency practitioners
94
. Such as response rate
is generally seen as a robust sample for analysis
95
. Given
the population size, number of responses and assuming
a conservative measure of variance in responses, we
are 95 per cent certain that our responses are within
approximately +/-15 per cent of accuracy
96
.
A further indication of con?dence of results is the standard
error.
94 Of the turnaround professionals 58 per cent said they were regulated or
licensed by an insolvency regulator – implying they are licensed insolvency
practitioners.
95 As stated in Fred Van Bennekom, Principal Great Brook Consulting
96 Fred Van Bennekom, Principal Great Brook Consulting
The value of the insolvency industry
63
6.2 The number people employed by the
insolvency industry
In this section we discuss our methodology for calculating
the number of people employed in the United Kingdom
insolvency industry. The results of this analysis are presented
in sections 2.5 and 3.1.
To determine the number of people employed in the industry
we analsyed company accounts of ?rms that classi?ed
themselves as ‘insolvency practitioners’. This information
was used alongside information obtained from The
Insolvency Service on the number of insolvency practitioners
in ?rms.
There are 714 companies in the United Kingdom that
employ insolvency practitioners according to Insolvency
Service information.
According to Companies House, there are 407 businesses
registered with then that classify themselves as insolvency
practitioners. We examined 300 of these companies; 74 per
cent of insolvency specialist ?rms registered on Companies
House. There were 124 matches that could be assessed in
more detail. We then used the following formula to calculate
the total employment in the insolvency industry:
Where:
e • = employee
p • = insolvency practitioner j
j • = individual employee
i= individual insolvency •
J= • total number of individuals
k • = ?rm
K = • total number of ?rms
ep
• = number of employees per practitioner
H • = number of insolvency practitioners in population
Emp • = Total employment in insolvency industry
The standard error bars are a type of con?dence interval.
Con?dence intervals are frequently used in statistics to
state the degree of accuracy. For instance, 95 per cent
con?dence levels are commonly used. Con?dence intervals
can be calculated by using the following formula:
Where:
CI • = con?dence interval
x
•
= the mean average of the sample
t • = the t statistic
The t statistic can be found in standard ‘t-tables’
97
. The
value depends on the level of con?dence required. For
instance the t value for a 95 per cent con?dence interval
is 1.96. Therefore, 95 per cent con?dence levels on charts
are almost double the size of the standard error bars.
Similarly, standard error bars are con?dence levels with a
t statistic of one. This is equivalent to a con?dence level of
68.3 per cent, i.e. a 15.9 per cent two-tailed test.
Another factor that may affect the robustness of our survey
results is sample bias. If there is a larger sample of one
‘type’ of respondent, and this is not a true re?ection of the
population as a whole, results can be skewed towards
opinions and facts about that ‘type’ of respondent.
For instance, insolvency practitioners that work for an
insolvency specialist ?rm may have different variables
(for instance wages, opinions, etc.) than an insolvency
practitioner working for an accountancy ?rm. If a larger
share of accountancy practitioners respond to the survey
this could skew results. We therefore weight survey
responses according to the type of business the insolvency
practitioner works in.
97 T-tables list values for t-distributions with degrees of freedom for a range of
given con?dence intervals
The value of the insolvency industry
64
To calculate the total number of jobs saved in the industry
per year we used the responses from the following
questions asked in our survey of insolvency professionals:
Thinking of the last ?ve businesses that you worked with…
What as the nature of the work? – we took responses for •
formal insolvency and, separately, for rescue
When did the process begin? – we took responses for •
‘this month’ and ‘within the last year’ only.
How many people were employed when the process •
began?
How many people were employed when the process •
?nished? – the number of people employed when the
process was completed gives the number of jobs saved.
We used the following equation to calculate the total
number of jobs saved by the industry
Where:
f • = actual number of business failures
f
ˆ
• = number of business failures according to survey
sˆ • = number of jobs saved according to survey
s • = estimated total number of jobs saved
We also calculated the total ?nancial contribution (i.e.
turnover) of the companies that have been through formal
and informal insolvency proceedings. Again, the most
conservative measures were used when estimating the
results. To calculate turnover the following equation was
used:
Where:
f • = actual number of business failures
t • = ?rm’s turnover
e = • employment in ?rm
T= • total turnover
K = • ?rm
• = average turnover per employee
6.3 Estimating the indirect contribution of
the insolvency sector
In this section we explain our methodology for calculating
the indirect contribution of the insolvency industry through
multiplier effects. The results of this analysis are presented
in section 3.2.
We built a model to calculate upstream gross value added,
turnover and spend. This model uses the Of?ce of National
Statistics ‘Input-Output tables’. These tables are available
for the years 1999 to 2005. They are a matrix detailing
the amount of goods and services each sector provides
each other sector in the United Kingdom. Using the links
to other sectors we determine the support an industry
provides a sector — the upstream effect. This is calculated
in terms of gross value add, turnover and spend. We use
a similar technique to determine employee spend but
this takes into account the mean gross annual pay for all
employee jobs in each sector.
Where GVA and turnover sector data is missing for smaller
sectors the model uses employment data to ?nd how the
larger sector should be broken into the smaller sectors.
The model also includes a ‘mapping’ to make the input
output categories consistent with the standard industrial
classi?cation codes.
6.4 The number of jobs saved by the
insolvency industry
In this section we outline our methodology for determining
the number of jobs saved by the insolvency industry. The
results of this analysis are presented in section 3.3.
A person employed in a company following formal
insolvency proceedings is de?ned as having their job
retained, or ‘saved’. This does not necessarily mean that
those who have had their job ‘saved’ would become
unemployed if an alternative to insolvency proceedings had
taken place.
Of?cial ‘jobs saved’ numbers are not available. However,
we do have of?cial ?gures for the number of businesses
that went through insolvency proceedings up to the
third quarter of 2006. These ?gures are used to insure
that results extrapolated from the survey are consistent
with of?cial data. Similarly for the ?nancial turnover of
businesses, we evaluate survey results alongside of?cial
data to ensure ?gures were robust. Adjustments were
made accordingly. When estimating ?gures we used the
most conservative measures. We also made additional
calculations to check our ?gures were consistent with other
data available.
The value of the insolvency industry
65
Borrowed from a domestic bank 5 years ago (the •
loan has 10 years to full repayment) and bought real
estate (the hotel building), using it as security for the
bank loan.
Has observed the payment schedule and all other •
conditions of the loan up to now.
Has a mortgage, with the value of the mortgage •
principal being exactly equal to the market value of
the hotel.
Assumptions about the case
The business is experiencing liquidity problems. The
company’s loss in 2006 reduced its net worth to a
negative ?gure. There is no cash to pay the bank interest
or principal in full, due tomorrow. Therefore, the business
defaults on its loan. Management believes that losses
will be incurred in 2007 and 2008 as well.
The bank holds a ?oating charge against the hotel in
countries where ?oating charges are possible. If the
law does not permit a ?oating charge but contracts
commonly use some other provision to that effect, this
provision is speci?ed in the lending contract.
The business has too many creditors to negotiate
an informal out-of-court workout. It has the following
options: a judicial procedure aimed at the rehabilitation
or reorganization of the business to permit its continued
operation; a judicial procedure aimed at the liquidation
or winding up of the company; or a debt enforcement
or foreclosure procedure aimed at selling the hotel
either piecemeal or as a going concern, enforced either
in court (or through a government authority like a debt
collection agency) or out of court (for example, by
appointing a receiver).
Time
Time is recorded in calendar years. Information
is collected on the sequence of procedures and
on whether any procedures can be carried out
simultaneously. Potential delay tactics by the parties,
such as the ?ling of dilatory appeals or requests for
extension, are taken into consideration.
6.5 Estimating the wider economic
contribution of the insolvency industry
using World Bank data
In this section we explain our methodology for examining
the economic contribution of the insolvency industry. The
results of this analysis are presented in section 3.4.
We use data from the World Bank
98
to analyse business
conditions in 175 countries and compare this to economic
prosperity and growth. The purpose of our analysis is
to understand which of the measures of ‘ease of doing
business’ are most strongly linked with the prosperity of a
country and its entrepreneurial climate.
The World Bank data contains a collection of 39 objective
measures of business regulations and their enforcement
across 175 countries. Within these measures, there are
three that are directly related to the insolvency sector and
regime within a country: recovery rate when a business
fails; length of time to close a business; cost of closing a
business.
The World Bank describes how these estimates have been
made:
Doing Business studies the time, cost and outcomes
of bankruptcy proceedings involving domestic entities.
The data are derived from survey responses by local
insolvency practitioners and veri?ed through a study of
laws and regulations as well as public information on
bankruptcy systems.
To make the data comparable across countries, several
assumptions about the business and the case are
used.
Assumptions about the business
Is a limited liability company. •
Operates in the country’s most populous city. •
Is 100% domestically owned, with the founder, •
who is also the chairman of the supervisory board,
owning 51% (no other shareholder holds more than
5% of shares).
Has downtown real estate, where it runs a hotel, as •
its major asset.
Has a professional general manager. •
Has had average annual revenue of 1,000 times •
income per capita over the past 3 years.
Has 201 employees and 50 suppliers, each of which •
is owed money for the last delivery.
98 World Bank and International Finance Corporation, Doing Business 2007 ‘How
to reform’, 2007
The value of the insolvency industry
66
Some are not related to the insolvency sector e.g. the
dif?culty in hiring workers, number of procedures to start a
business, cost of importing and others. We compared the
ease of business indicators with measures of economic
performance.
We used correlation analysis to determine the strength
of the relationship of each of the ease of doing business
indicators with the following economic indicators:
National GDP per capita sourced from Penn world •
tables
99
Investment as a proportion of total GDP (on the basis that •
investment levels are an important driver of the long term
growth rate of an economy), from Penn tables
Economic growth, measured as annual change in gross •
domestic product
We discuss the results of our analysis of each of the above
economic indicators in turn.
Our results show that the indicator that had the strongest
correlation with GDP per capita is the overall ease of doing
business indicator. This has a correlation of -0.82 and
shows the strength of the link between a mature business
environment and a strong economy.
The indicator that has the second strongest relationship
with the economy is the recovery rate when a business is
closed (i.e. the proportion of debts that are recovered in the
event of business failure). Out of all the individual variables,
the recovery rate had the strongest association with the
prosperity of an economy. This suggests that the more
con?dent creditors in a country can be regarding repayment,
the more likely it is that the economy will be prosperous.
The analysis also showed that the time it takes to close a
business had a strong correlation
100
with GDP per capita:
of the 39 variables that correlated against GDP per capita,
the time taken to close a business had the twelfth highest
correlation (at -0.52).
The ‘cost of closing a business
101
’ had a correlation
coef?cient of -0.46. This suggests that as the cost of closing
a business falls, a country is more likely to be prosperous,
and vice-versa. The cost of closing a business is measured
as the percentage of the cost of the estate.
99 Center for International Comparisons of Production, Income and Prices, Penn
world tables, 2007
100 The correlation coef?cient indicates the strength and direction of a linear
relationship between two variables. The value 1 indicates a perfect increasing
linear relationship, the value ?1 a perfect decreasing linear relationship. The value
zero indicates no relationship. The closer the coef?cient is to either ?1 or 1, the
stronger the relationship between the variables.
101 Costs include all of?cial costs, such as court costs, fees of insolvency
practitioners, independent assessors, lawyers and accountants.
Cost
The cost of the proceedings is recorded as a
percentage of the estate’s value. The cost is calculated
on the basis of survey responses by insolvency
practitioners and includes court fees as well as fees
of insolvency practitioners, independent assessors,
lawyers and accountants. Respondents provide cost
estimates from among the following options: less
than 2%, 2–5%, 5–8%, 8–11%, 11–18%, 18–25%,
25–33%, 33–50%, 50–75% and more than 75% of the
value of the business estate.
Recovery rate
The recovery rate is recorded as cents on the dollar
recouped by creditors through the bankruptcy or
insolvency proceedings. The calculation takes into
account whether the business emerges from the
proceedings as a going concern as well as costs and
the loss in value due to the time spent closing down.
If the business keeps operating, no value is lost on the
initial claim, set at 100 cents on the dollar. If it does
not, the initial 100 cents on the dollar are reduced
to 70 cents on the dollar. Then the of?cial costs of
the insolvency procedure are deducted (1 cent for
each percentage of the initial value). Finally, the value
lost as a result of the time the money remains tied
up in insolvency proceedings is taken into account,
including the loss of value due to depreciation of the
hotel furniture. Consistent with international accounting
practice, the depreciation rate for furniture is taken
to be 20%. The furniture is assumed to account for a
quarter of the total value of assets. The recovery rate is
the present value of the remaining proceeds, based on
end-2006 lending rates from the International Monetary
Fund’s International Financial Statistics, supplemented
with data from central banks.
This methodology was developed in Ef?ciency in
Bankruptcy, an ongoing research project by Simeon
Djankov, Oliver Hart, Caralee McLiesh and Andrei
Shleifer.
Source: World Bank/IF,http://www.doingbusiness.org/
MethodologySurveys/ClosingBusiness.aspx
The value of the insolvency industry
67
6.6 Forecasting individual and corporate
insolvencies
In this section we explain our methodology for determining
the drivers of corporate and individual insolvency. We also
explain how we used this, alongside other information,
to forecast the number of individual and corporate
insolvencies.
To understand and quantify the main drivers of personal and
corporate insolvencies we built an econometric model.
Econometric modeling is a widely used method for
forecasting. Our models were built by calculating the best
?tting relationship between variables through regression
analysis. The ordinary least squares regression looks at the
historical relationship between the dependent variable – the
variable we wish to predict – and explanatory variables – the
other variables in the model.
Our econometric model is de?ned by the following
regression equations:
Where:
y • = actual number of company/ personal insolvencies
yˆ • = predicted company/ personal insolvencies
t • = time = 1989,…,2006
t
ˆ • = time period used for forecasts = 2007,…,2012
• = coef?cient
? • = estimated coef?cient
x • = variables
xˆ
• = forecasts of variables
In terms of the link between different ‘ease of doing
business’ variables and the proportion of GDP accounted
for by investment, we again found links between various
features of the insolvency regime and this measure of
economic success. All ‘ease of business’ indicators were
not as strongly correlated with investment as a share of
GDP as they were with GDP per capita. However, the
‘recovery rate’ – the amount recovered when a business
is closed – had a stronger correlation with investment as a
share of GDP than any other factor examined.
The index that had the second strongest correlation with
investment as a share of GDP was the overall ease of
doing business indicator, with a correlation of -0.51. The
time to close a business had a relatively low correlation
at -0.23. The cost of closing a business was only weakly
related to investment as a share of GDP, with a correlation
of -0.18. This indicates that the relevant factor from an
investment point of view is the recovery rate rather than
cost and time of closing a business. Nevertheless, these
factors are related to each other and it would be dif?cult to
?ourish in one area and be inadequate in others.
We also analysed the impact of the insolvency regime on
economic growth.
To calculate the relationship between economic growth
and the insolvency industry we looked at GDP growth rates
in OECD countries. We took only the countries which had
GDP per capita over $20,000. We used the average rate of
growth of gross domestic product since 2000, up to where
we had data available, which was either 2005 or 2006.
Using the same method as above, we calculated the
correlation between the OECD countries and the World
Bank ease of doing business indicators. The recovery
rate has a correlation of +0.46 with average annual GDP
growth. ‘Time to close a business’ has a correlation
coef?cient of -0.39. The overall ease of business index has
a correlation of -0.34.
The value of the insolvency industry
68
within an acceptable degree of accuracy. Nevertheless, we
use several scenarios in order to assess the likely affect on
company insolvencies.
We now investigate the reliability of the model. The p-value
of the explanatory variables is less than 0.05, indicating they
are accurate within the 95 per cent con?dence level and
suggesting the model is robust:
The p-value for •
was 0.001
the p-value for • was 0.002.
There are other ways to assess the accuracy of the model.
The r-squared is often used a measure the model’s accuracy
– with a value of one indicating that the explanatory variables
explain 100 per cent of the dependent variables variance. A
value of zero indicates that the explanatory variables cannot
explain any of the changes in the dependent variable. The
r-squared of our corporate insolvencies model is 0.6044,
which indicates 60.4 per cent of the variation in the model
can be accounted for by the changes in the independent
variables.
Turning to individual insolvencies, the model used for
predicting individual insolvencies was:
Where:
market = a variable used to estimate the effect of the •
change in environment to individual insolvencies
all other terms as de?ned previously •
The market variable was used to assess the effect of the
change in market conditions on personal insolvency. The
market variable represented the change in demand and
supply conditions resulting from an increase in awareness
of individual voluntary arrangements and the subsequent
action of creditors of restricting their supply. It took the value
until 2001. From 2002 a time trend was used, with the value
one in 2002 up to ?ve in 2006.
We used the ‘general to speci?c approach’ to decide on
the most appropriate variables to put into our model. This
approach starts with a high number of variables in the
model and removes the least signi?cant variables, one
by one, until a satisfactory model is obtained. There is a
trade-off when deciding the most appropriate number
of explanatory variables to include in a model. As the
number of explanatory variables increases, the ability
to explain ?uctuations within the dependent variable
also increases. However, the chance of ?nding spurious
relationships between variables also increases. When
forecasting, there is a further concern with each additional
explanatory variable that is added to the model. Each
of the explanatory variables needs to be predicted and
inaccuracies in predicting the variables will affect the
model’s reliability. We therefore removed insigni?cant
variables from our regressions until only the most
signi?cant variables remained.
The model used for predicting corporate insolvencies was:
Where:
• = the intercept
•
= Gross Domestic Product, annual percentage
change, one year prior to t
• = error term
all other terms as de?ned previously •
Our model for corporate insolvencies used seventeen
periods of observation, for the years 1989 to 2006.
Gross domestic product was chosen as the main
explanatory variable. Since gross domestic product
encapsulates changes in the macroeconomy it includes
the main factors that will affect businesses. It takes time
for changes in the economy to result in a business failure.
Therefore GDP growth is lagged by one year in our model.
As we have forecast GDP growth
102
on a quarterly basis
since 1993, values for the forecast period can be assumed
102 Our forecasts are published by the treasury
The value of the insolvency industry
69
Figure 42 Number of business failures, actual
and predicted, thousand (RHS), England and
Wales, and Gross domestic product growth,
United Kingdom, 2000-2012
Source: Insolvency Service, Of?ce of National Statistics and cebr
forecasts, 2007
We now investigate the reliability of the model. The p-value
of the explanatory variables is less than 0.09, indicating
that they are accurate within the 90 per cent con?dence
level and suggesting the model is relatively robust:
The p-value for •
was 0.087
the p-value for market was 0.002 •
the p-value for • was 0.06.
The r-squared of our personal
insolvencies model is 0.7193, which
indicates that 71.9 per cent of the
variation in the model can be accounted
for by the changes in the independent
variables.
Now we have determined the
robustness of the models we can use
them to forecast insolvencies.
We use the past relationship of
the explanatory variables with the
dependent variable. Then, by predicting
their future changes in the explanatory
variables, we determine the likely future
impact of the dependent variable. We
de?ne a set of scenarios in chapter
5. The results from the econometric
regression were analysed against interviews and survey
responses to verify and corroborate ?ndings.
In Figure 42 we present our base forecasts of company
insolvencies. This ?gure also contains the standard errors
of our forecasts.
0
5
10
15
20
25
30
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Total company failures
Base estimates for business failures
Lower standard error bar
Upper standard error bar
The value of the insolvency industry
70
Mike Norris; Director of Policy Development, Review and •
International Issues at The Insolvency Service
Phillip Sykes; Member of the Joint Insolvency Committee, •
The Institute of Chartered Accountants in England and Wales
Andrew Tate; Member of the Joint Insolvency Committee, •
The Association of Chartered Certi?ed Accountants
Jeremy Willmont; Partner, Moore Stephens •
In Figure 43 we present our base forecasts of individual
insolvencies. This ?gure also contains the standard errors
of our forecasts.
Figure 43 Number of business failures, actual
and predicted, thousand (RHS), England and
Wales, and Gross domestic product growth,
United Kingdom, 2000-2012
Source: Insolvency Service, Of?ce of National Statistics and cebr
forecasts, 2007
6.7 Expert interviews
In this section we outline the insolvency industry experts
that we interviewed to gain additional insight of the
insolvency industry.
We interviewed seven insolvency industry specialists:
Anne Bryce; Director of insolvency, Institute of Chartered •
Accountants Scotland
Chris Garwood; Partner Carrick Reed insolvency, •
representative of the Solicitors Regulation Authority on
the Joint Insolvency Committee
Geoffrey Fitchew; Chairman, Insolvency Practices •
Council
0
20
40
60
80
100
120
140
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Total company failures
Base forecast of business failures
Lower standard error bar
Upper standard error bar
The value of the insolvency industry
71
Ellis, D (1998) ‘The Effect of Consumer Interest Rate
Deregulation on Credit Card Volumes, Charge-offs, and the
Personal Bankruptcy Rate’, Bank Trends 98 (05) Federal
Deposit Insurance Corporation
Fan, W., White, M.J. (2003) ‘Personal Bankruptcy and
the Level of Entrepreneurial Activity’, Journal of Law and
Economics 46, pp 543 – 568.
Fay, S; Hurst, E; White, M (1998) ‘The Bankruptcy Decision:
Does Stigma Matter?’ Department of Economics Working
Paper Series, Department of Economics, University of
Michigan
Friedman, M (1957) ‘A Theory of the Consumption
Function’, National Bureau of Economic Research
(Princeton, N.J., 1957)
Georgellis, Y., Wall, H.J. (2006) ‘Entrepreneurship and the
Policy Environment’, Federal Reserve Bank of St. Louis
Review 88(2), pp 95-111.
Greene, W (1991) Econometric Analysis MacMillan, New
York
Gropp, R; Scholz, J; White, M (1997) ‘Personal Bankruptcy
and Credit Supply and Demand’ The Quarterly Journal of
Economics 112 (1); 217-251
Gross, D; Souleles, N (2002) ‘An Empirical Analysis of
Personal Bankruptcy and Delinquency’ The Review of
Financial Studies 15 (1) 319-347
Hendry, D. F. (1995) Dynamic Econometrics. Oxford: Oxford
University Press.
Hendry, D. F., and Mizon, G. E. (1993) ‘Evaluating dynamic
econometric models by encompassing the VAR’ Phillips,
P. C. B.(ed.), Models, Methods and Applications
Holtz-Eakin, D., Joulfaian, D., Rosen H.S. (1994) ‘Sticking it
Out: Entrepreneurial Survival and Liquidity Constraints’, The
Journal of Political Economy 102:1, pp 53-75.
Japelli, T (1990) ‘Who is Constrained in the US Economy?’
Quarterly Journal of Economics 104 219-34
Kocherlakota, N (1996) ‘Implications of Ef?cient Risk Sharing
without Commitment’ Review of Economic Studies 63 (4):
595-609
Kowalewski, K (1997) ‘Personal Bankruptcy: Theory and
Evidence’ Economic Review Federal Reserve Bank Of
Cleveland
6.8 Bibliography
Acs, Z., Audretsch, D., Braunerhjelm, P., Carlsson, B.
(2005), ‘Growth and Entrepreneurship: An empirical
assessment’, Max Planck Institute of Economics, Group
Entrepreneurship, Growth and Public Policy.
Armour, J., Cumming, D. (2005) ‘Bankruptcy Law and
Entrepreneurship’, University of Cambridge Centre for
Business Research Working Paper No. 300.
Athreya, K (2004) ‘Shame as it ever was: Stigma and
Personal Bankruptcy’, Federal Reserve Bank of Richmond
Economic Quarterly Journal.
Audretsch, D.B., Keilbach, M., (2005) ‘Entrepreneurship
capital and regional growth’, Annals of Regional Science
39, pp 457–469.
Autio, E., Ho, Y.P., Wong, P.K., (2005) ‘Entrepreneurship,
Innovation an Economic Growth: Evidence from GEM
data’, Small Business Economics 24, pp 335–350
Berkowitz, J., White, M.J. (2004) ‘Bankruptcy and small
?rms’ access to credit’, The RAND Journal of Economics
35:1, pp. 69-84.
Bosma, N., De Wit, G., Van Praag, M. (2004), ‘Initial Capital
Constraints hinder Entrepreneurial Venture Performance’,
Tinbergen Institute Discussion Paper.
Buckley and Brinig (1995) ‘The Bankruptcy Puzzle’
Working Paper George Mason University School of Law
Carree, M., Thurik, R., Van Stel, A., (2005) ‘The Effect of
Entrepreneurial Activity on National Economic Growth’,
Small Business Economics 24, pp 311–321.
Davidson, J. E. H., Hendry, D. F., Srba, F., and Yeo, J. S.
(1978). ‘Econometric modelling of the aggregate time-
series relationship between consumers’ expenditure and
income in the United Kingdom’ Economic Journal, 88,
661--692.
Dubey, O, Geanakolaplos, J and Shubik, M (2005) ‘Default
and Punishment in General Equilibrium’ Econometrica 73
(1):1-38
Edelburg, W (2003) ‘Risk Based Pricing of Interest Rates in
Household Loan Markets’ Federal Reserve Board Working
Paper 2003-62
The value of the insolvency industry
72
Yeager, F (1994) ‘Personal Bankruptcy and Economic
Stability’ Southern Economic Journal 41
Zame, W (1993) ‘Ef?ciency and the Role of Default when
Security Markets are Incomplete’ American Economic
Review 83 (5) 1142-64
6.9 Membership survey
A copy of the survey we sent to the members of R3 is
contained as a separate document.
Lawrence, E (1995) ‘Consumer Default and the Life Cycle
Model’ Journal of Money, Credit and Banking 27 (4):
939-954
Mizon, G. E. (1995) ‘A simple message for autocorrelation
correctors: Don’t’ Journal of Econometrics, 69, 267--288.
Mizon, G., and Richard, J. (1986) ‘The encompassing
principle and its application to non-nested hypothesis
tests’ Econometrica, 54, 657--678.
Peterson, R and Aoki, K (1984) ‘Bankruptcy Filings
Before and After the Bankruptcy Reform Act’ Journal of
Economics and Business 36
Repetto, A (1998) ‘Personal Bankruptcies and Individual
Wealth Accumulation’, Working Paper, Universidad de
Chile
Runkle, D (1991) ‘Liquidity Constraints and the Permanent
Income Hypothesis: Evidence from Panel Data’ Journal of
Monetary Economics 71-87
Salgado-Banda, H. (2005) ‘Entrepreneurship and
Economic Growth: An Empirical Analysis’ Dirección de
Estudios Económicos Dirección, General de Investigación
Económica, Banco de México.
Sheirs, A and Williamson, P (1987) ‘Nonbusiness
Bankruptcies and the Law: Some Empirical Results’
Journal of Consumer Affairs 21 (2)
Shephard, L (1984) ‘Personal Failures and Bankruptcy
Reform Act of 1978’ Journal of Law and Economics 27
(2):419-37
Simmons, P (1989) ‘Bad Luck and Fixed Costs in Personal
Bankruptcies’ The Economic Journal 99 (394): 92-107
Visa USA Inc (1996) ‘Consumer Bankruptcy: Causes and
Implications’, San Fransisco: Visa USA Inc July 1996
White, M (1997) ‘Why Don’t More Households File for
Bankruptcy?’ Journal of Law, Economics and Organization
14 (2)
White, M.J. (2005) ‘Personal Bankruptcy: Insurance, Work
Effort, Opportunism and the Ef?ciency of the ‘Fresh Start’’,
Working Paper University of California, San Diego, and
National Bureau of Economic Research
Woodward, W and Woodward, S (1983) ‘Exemptions as
an Incentive to Voluntary Bankruptcy: An Empirical Study’
Commercial Law Journal
doc_477747798.pdf
A study into the economic significance of the insolvency, recovery and turnaround profession July 2008.
A study into
the economic
signi?cance of the
insolvency, recovery
and turnaround
profession
July 2008
Sponsored by:
of the
industry
the value
insolvency
Disclaimer
Whilst every effort has been made to ensure the accuracy of the
material in this document, neither centre for economics and business
research ltd nor the report’s authors will be liable for any loss or
damages incurred through the use of the report.
Authorship and acknowledgements
This report has been produced by cebr, an independent economics
and business research consultancy established in 1992.
Contributors to this report were Sarah Bloom?eld, Mark Pragnell
(project director), Jonathan Said, Neil Shah and John Ward.
This study has been commissioned by R3 – the United Kingdom’s
main trade association for insolvency and turnaround professionals,
representing over 97 per cent of Insolvency Practitioners.
Nevertheless, the views expressed herein are those of the authors
only and are based upon independent research by them.
Reports
The summary report outlines the research conducted and highlights
the key ?ndings. The full report examines, quanti?es and considers
the current and future economic signi?cance of the insolvency
industry and can be accessed at www.r3.org.uk.
London, July 2008
All rights reserved. Copyright © centre for economics and business research ltd. 2008.
of the
industry
the value
insolvency
Summary report .................................................................................................................................................. 1
1 Introduction and background ............................................................................................................. 7
1.1 De?nitions .......................................................................................................................................................... 8
1.2 Functions of the insolvency practitioner .............................................................................................................. 9
1.3 Research methods ........................................................................................................................................... 12
1.4 Structure of this report ...................................................................................................................................... 12
2 An overview of the industry ............................................................................................................... 13
2.1 Main legislative changes ................................................................................................................................... 14
2.2 Overall trends in insolvency............................................................................................................................... 14
2.3 Trends in corporate insolvency ......................................................................................................................... 15
2.4 Trends in personal insolvency ........................................................................................................................... 18
2.5 The size and structure of the industry ............................................................................................................... 19
2.6 The insolvency practitioners.............................................................................................................................. 24
3 The importance and impact of the insolvency industry ........................................................ 29
3.1 The direct impact of the insolvency sector ........................................................................................................ 30
3.2 The indirect contribution to the economy .......................................................................................................... 32
3.3 Saving businesses from insolvency and protecting employees.......................................................................... 33
3.4 Encouraging entrepreneurship and liquidity....................................................................................................... 35
4 Strengths and weaknesses of the United Kingdom’s insolvency industry ................... 39
4.1 The balance between creditor’s and debtor’s interests ...................................................................................... 40
4.2 The ef?ciency of the United Kingdom’s insolvency industry ............................................................................... 43
4.3 The regulation of the industry............................................................................................................................ 46
5 The future of the insolvency industry ............................................................................................ 49
5.1 The main drivers of growth in the insolvency industry........................................................................................ 50
5.2 Prospects for the economic contribution of the insolvency industry .................................................................. 51
5.3 Prospects for individual insolvencies ................................................................................................................. 52
5.4 Prospects for corporate failures ........................................................................................................................ 56
5.5 The long term challenge of globalisation ........................................................................................................... 57
5.6 Study key conclusions ...................................................................................................................................... 59
5.7 Areas for review and possible action ................................................................................................................. 59
6 Appendix: Explanatory notes ............................................................................................................ 61
6.1 Analysing the survey results .............................................................................................................................. 62
6.2 The number people employed by the insolvency industry ................................................................................. 63
6.3 Estimating the indirect contribution of the insolvency sector ............................................................................. 64
6.4 The number of jobs saved by the insolvency industry ....................................................................................... 64
6.5 Estimating the wider economic contribution of the insolvency industry using World Bank data ......................... 65
6.6 Forecasting individual and corporate insolvencies ............................................................................................. 67
6.7 Expert interviews .............................................................................................................................................. 70
6.8 Bibliography ..................................................................................................................................................... 71
6.9 Membership survey .......................................................................................................................................... 72
Contents
The value of the insolvency industry
1
Summary report
• employs 12,700 people directly, including 1,744 licensed
insolvency practitioners, in 714 ?rms
• makes a direct contribution to national GDP of £780
million annually — plus an extra £230 million indirect
contribution through employees’ spending and purchases
from suppliers
• provides assistance to businesses with a combined
turnover of £132 billion each year
• helps to save 910,000 jobs annually in businesses that
are suffering from solvency problems
• is ranked ninth out of 127 countries for speed with which
it deals with troubled businesses and tenth out of 175
countries for the amount it recovers for creditors
• plays a vital role in maintaining a business environment
in which creditors are willing to lend, entrepreneurship is
encouraged and the economy can ?ourish. Our research
demonstrates that jurisdictions, like the United Kingdom,
that treat creditors appropriately in times of business
dif?culties are the most likely to be prosperous in the
longer-term
• should review and potentially further develop its regulatory
structures to ensure the United Kingdom maintains
its favourable position in the international rankings
of jurisdictions, and can best bene?t from increasing
globalisation and international mobility of business
centre for economics and business research ltd have
conducted an independent study into the economic
signi?cance of the insolvency sector and its potential future
contribution to United Kingdom prosperity.
The value of the insolvency industry
2
What does the insolvency industry do?
Insolvency is the inability of an individual or entity to pay
its debts when they are due. The role of the insolvency
practitioner is to administer an insolvency outcome within
the legislation and to ensure a fair, ef?cient and quick
redistribution of assets. In doing this, the regime itself,
and the individual practitioners within it, need to strike an
appropriate long-term balance between the interests of
debtors and creditors.
An often overlooked part of the industry is its role in helping
businesses and individuals avoid insolvency in the ?rst
place, both through providing advice to individuals and
businesses as well as through instigating formal ‘rescue
procedures’. The importance of these additional roles is
revealed in some of the results of a survey of insolvency
practitioners undertaken for this report; 67 per cent of
insolvency practitioners’ organisations are involved
in restructuring or turnaround of companies.
Meanwhile, an insolvency practitioner, working on average
43 hours a week, will typically spend twenty hours (48
per cent of their working week) on formal insolvency
procedures and seven hours per week preventing
insolvency.
centre for economics and business research ltd have
conducted an independent study into the economic
signi?cance of the insolvency sector and its potential future
contribution to United Kingdom prosperity.
The report identi?es the direct contribution of the insolvency sector to the United Kingdom using conven-
tional measures such as employment and gross value added. However, the role and signi?cance of the
industry is signi?cantly underplayed by considering these narrow measures. Rather, the industry plays a
vital wider role in creating an environment that balances the interests of creditors and debtors so as to be
conducive to entrepreneurship and risk taking, as well as providing expertise and a service for businesses
and consumers facing ?nancial dif?culty. We assess the signi?cance of this wider role and quantify the
number of business and jobs saved by the industry.
In this context, we also look at the future of the industry, investigating its strengths, weaknesses, oppor-
tunities and threats. We identify how the sector will need to adapt to meet future challenges and how the
current regulatory framework may hinder the United Kingdom’s ability to remain among the top of interna-
tional competition.
The size and shape of the industry
The insolvency industry is centred around insolvency
practitioners, of which there are 1,744 in the United Kingdom.
A considerable network of staff is required to support these
insolvency practitioners. We estimate that, in total, the
industry accounts for approximately 12,700 jobs. This
includes insolvency practitioners, assistant solicitors and
accountants, administrative and reception staff.
The evidence we have collected points to a degree
of polarisation in the industry. Nearly a third of all
insolvency practitioners (30 per cent) reported insolvency
related turnover in their businesses in excess of £10 million
(although some of these insolvency practitioners will be
in the same business). At the same time, 27 per cent of
insolvency practitioners reported turnover of less than
£500,000. This polarisation is partly related to the business
in which insolvency practitioners operate and re?ects
overall trends in the wider business services sector. Within
accountancy ?rms, more than half of respondents (53 per
cent) reported insolvency related turnover over £10 million
while only ten per cent reported turnover of less than
£500,000. In contrast, only twelve per cent of insolvency
specialists and law ?rms reported insolvency related
turnover to be greater than £10 million and 54 per cent of
these ?rms reported turnover to be less than £500,000.
The value of the insolvency industry
3
Despite the polarisation, the work that insolvency
practices undertake is varied. Firms deal with a mixture of
personal and corporate insolvencies, with 84 per cent of
insolvency professionals’ ?rms involved in a mixture
of individual and business work. Only eleven per cent
of organisations are involved with just businesses and only
four per cent deal with just individuals.
Although the industry is represented in every region of
the United Kingdom and ?rms are spread relatively evenly
across the country, a disproportionately large number of
?rms have an of?ce in central London (49 per cent) and/
or the North West (39 per cent). Likewise, London, the
South East and the North West have the larger shares of
insolvency professionals.
Although 79 per cent of insolvency practitioners are male,
women are becoming a growing and signi?cant part
of the industry. Half of practitioners in the industry aged
less 35 years are female.
The direct contribution of the insolvency sector
The conventional measures of the economic contribution
made by a sector to the economy are measures of
employment and gross value added (GVA).
We estimate the direct employment in the industry to be
approximately 12,700 jobs, while its gross value added
is £780 million per annum, equivalent to ?ve per cent
of the entire accounting profession and 0.08 per cent
of the national economy. In addition, the insolvency
industry’s purchases from suppliers and spending by
its employees accounts for a further £417 million of
national output.
The indirect contribution of the
insolvency sector
Direct measures of the impact of the insolvency sector
underestimate its importance in contribution to national
prosperity. This is because they fail to account for
the ‘enabling’ role played by the industry. This role
includes creating an environment that is conducive for
entrepreneurship and appropriate risk taking, while
safe-guarding creditors (and providing expertise and a
service for businesses and consumers faced with ?nancial
dif?culty). We considered two ways to try and measure this
role.
The ?rst approach makes use of the survey results we
collected. This allows us to estimate the number of
businesses and jobs saved.
The companies put through formal proceedings had an
average of 25 employees before the process began and
eighteen employees when the process was completed;
so, on average, 72 per cent of the workforce was retained
(or ‘saved’) after formal insolvency. This equates to a
total number of jobs saved through formal insolvency
proceedings of 312,000 in 2006 in corporations alone.
0%
5%
10%
15%
20%
25%
C
e
n
t
r
a
l
L
o
n
d
o
n
O
u
t
e
r
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
?
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
?
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
Source: cebr survey of R3
members, 2007, with standard error
bars. The number of responses
from Northern Ireland was too low
for reliable estimates to be made
Region in which insolvency practitioner is based, share of insolvency practitioners, Great Britain, 2007
The value of the insolvency industry
4
A further 3,300 business were saved through rescue
procedures in 2006. Although fewer ?rms go through
rescue rather than formal proceedings, they are typically
bigger with an average of 220 employees in the company
before the rescue procedures begin. After the rescue has
been completed, on average 80 per cent of employees
remain employed. We estimate a total of 598,000
employees were saved through rescue procedures.
Considering rescue procedures, as well as formal
proceedings, we estimate the industry is responsible for
saving 910,000 jobs in businesses with a combined
turnover of £132 billion per annum in 2006.
Our second approach to assessing the wider economic
contribution of the insolvency sector uses statistical
analysis of internationally comparable data to identify the
relative importance of the insolvency regime among other
factors in determining the prosperity of a country.
The World Bank publish 39 objective and consistent
measures of ‘ease of doing business’ across 175
countries. Within these 39 measures, there are some
that are directly related to the insolvency sector and the
insolvency regime within a country (e.g. recovery rate when
a business fails), and some which are not related to the
insolvency sector (e.g. the dif?culty in hiring workers). The
purpose of our analysis was to understand which of the 39
measures of ‘ease of doing business’ were most strongly
linked with the prosperity of a country.
Of all 39 indicators reported on by the World Bank, the
recovery rate when a business is closed (i.e. the pence on
the pound recouped by creditors through the bankruptcy
or insolvency proceedings) is the most strongly correlated
to a country’s prosperity (measured as gross domestic
product per capita). The time it takes to close a business
is also strongly related. Likewise, the recovery rate and
speed of closure are also strongly correlated to rates of
investment in an economy, and overall rates of economic
growth. These ?ndings highlight the importance of the
insolvency regime in delivering a robust and vibrant
economy.
The United Kingdom’s insolvency regime performs well
on these measures against other jurisdictions. The United
Kingdom is ranked tenth out of 175 countries for the
amount recovered for creditors when a business is closed;
it is successful in recovering an average of 85 per cent of
assets when a business closes. It is ranked ninth quickest
in the time taken to close a business with the average time
taken being one year.
Rank Country Recovery rate (%) *
1 Japan 92.7
2 Singapore 91.3
3 Norway 91.1
4 Taiwan 89.5
5 Canada 89.3
6 Finland 89.1
7 Ireland 87.9
8 Belgium 86.4
9 Netherlands 86.3
10 United Kingdom 85.2
11 Korea 81.8
12 Australia 79.7
=12 Iceland 79.7
14 Hong Kong, China 78.9
15 Spain 77.6
16 United States 77.0
17 Sweden 75.7
18 Portugal 75.0
19 Austria 73.7
20 Denmark 70.5
28 Germany 53.1
32 France 48.0
49 Italy 29.7
Amount recovered when typical business is
closed, top twenty out of 127 countries plus
other key economies, 2007
Source: World Bank and cebr analysis, 2007
*Note: Recovery rates quoted are based on the outcome a speci?c
scenario developed and consistently applied by the World Bank. It is not
a measure of average recovery rates across each jurisdiction. Indeed, we
recognise that average recovery rates in the United Kingdom are much
lower than this speci?c example.
The value of the insolvency industry
5
Future trends
Looking to the future, the study provides model-based
predictions for both business and individual insolvencies.
The current so-called ‘credit crunch’ and widely-predicted
slowdown in the United Kingdom macroeconomy will put
upward pressure on both business failures and individual
insolvencies. However, the rapid growth in use of Individual
Voluntary Arrangements that has been seen in recent years
cannot be sustained inde?nitely.
In our base scenario of 1.8 per cent growth in the United
Kingdom economy in 2008 followed by 2.1 per cent in
2009 and 2.6 per cent in 2010, corporate insolvencies
rise moderately; reaching a high of 18,000 in 2010 from
14,600 in 2008. After the economy recovers, failures are
expected to come down to approximately 17,700 in 2012.
But relatively small changes in economic growth can have
an ampli?ed effect on corporate failures. If the economy
grows slower than our base scenario or has a period
of recession, one should expect much higher levels of
corporate insolvency.
Our scenario analysis suggests individual insolvencies
will remain above 100,000 a year after 2008. Individual
insolvencies are likely to reach between 120,000 and
140,000 by 2012.
Overall, respondents to our survey of R3 members expect
growth in the insolvency industry’s turnover to slow over
the next ?ve years compared to recent trends. On average,
turnover is expected to grow by sixteen per cent in the
next ?ve years in comparison to twenty per cent over the
last ?ve years.
Looking further ahead, globalisation provides signi?cant
opportunities and poses many threats to the United
Kingdom insolvency industry. With growth in international
trade and emerging economies, the number and
importance of multi-national companies is expanding.
Meanwhile, businesses are becomingly increasingly
footloose internationally. In this context, there is now
greater competition between jurisdictions to attract locating
and relocating businesses, as well as capital. In addition,
this is likely to move the focus of the insolvency industry
further towards turnaround rather than formal insolvency.
Areas for review and possible action
Although the thrust of our research has been to identify
and quantify the contribution made by the insolvency
industry to the United Kingdom economy, it has highlighted
areas that the industry and its regulators may need to
address if the future contribution and growth prospects of
the industry are to be maximized.
There are ?ve areas that we recommend that
industry should review further and, potentially, identify
improvements to be made:
1. Improving the responsiveness of the regulatory
regime is an area for consideration. The questionnaire
responses indicated a stark contrast of views between
the ability of the industry to respond to a changing
regulatory environment and the speed at which regulators
adapt to a change in the regulatory environment. Four
out of ten insolvency professionals (41 per cent) selected
the speed at which regulators can adapt to a changing
environment as a weakness, eight per cent selected it as
a strength. In contrast, 57 per cent reported the ability
of the industry to adapt to a changing environment as a
strength, only ?ve per cent selected it as a weakness.
A signi?cant factor behind the speed in which regulators
can adapt is coordinating the efforts of multiple parallel
regulators. Our survey of insolvency practitioners revealed
that having multiple regulators is their biggest concern:
68 per cent of respondents selected having eight
regulators plus The Insolvency Service as a weakness of
the sector; only one per cent selected it as a strength.
Expert interviews revealed that a lack of resource means
it is dif?cult to implement changes quickly.
2. The consistency of the industry was highlighted as
a weakness. The survey respondents identi?ed that
a lack of consistency within the industry represented
a key weakness: 31 per cent of respondents felt the
industry lacked consistency, nineteen per cent selected
it as a strength. Many of the industry experts that we
interviewed suggested that, although the regulation
was consistent, and there was much communication
across regulators, the structure of regulators can give the
impression that that the industry lacks consistency.
Consistent outcomes are more likely to be achieved by
a greater commitment to co-operative working from the
different regulators. For example, other industries where
there has been concern regarding regulatory overlap have
attempted to respond to these concerns by developing
‘concordats’ and ‘memoranda of understanding’.
The value of the insolvency industry
6
3. Many of the experts we interviewed felt that the multiple
roles of The Insolvency Service led to possible
con?icts of interest. Our survey of insolvency practitioners
revealed that almost half the industry (42 per cent)
thought the multiple roles was a weakness. Just ?ve
per cent selected it as a strength. Industry experts cited
several problems, including:
• being a licenser and also regulating other licensees
leads to problems with transparency as it is not clear
who regulates The Insolvency Service
• dealing with cases themselves may affect The
Insolvency Service’s incentives. Although some felt
there was a role for the industry in dealing with some
cases that are not suitable for some insolvency
practitioners – for instance when there has been
illegalities – interviewees thought that there should be
a clearer line as to what was within The Insolvency
Service’s jurisdiction and what was not
• there was concern that the insolvency practitioners
licensed by The Insolvency Service were not
monitored fully
4. The cost of insolvency was highlighted as a relative
weakness of the United Kingdom’s regime in our
international comparative analysis, our interviews with
industry experts and in the responses to our internet
survey of R3 members.
It is relatively costly to close a business in the United
Kingdom compared to other international jurisdictions – the
United Kingdom was ranked 22nd with the average cost
estimated to be six per cent of the value of the estate.
Meanwhile, our survey of insolvency professionals revealed
that 23 per cent of insolvency professionals thought the
cost of the procedures was a weakness of the industry,
while only eight per cent selected it as a strength.
Three important points of clari?cation need to be made
regarding this issue. First, the cost of closing a business
is not the same as insolvency practitioners’ fees. Rather,
this represents just one element in the cost of closing
the business which also includes court costs, fees of
independent assessors, lawyers and accountants.
Second, the analysis of the World Bank data suggested
that the cost of closing a business was less important in
promoting economic activity and growth than a number
of other aspects of the insolvency industry i.e. the
amount recovered when a business is closed and the
time taken to close a business – all of which the United
Kingdom performs well on. Third, the apparent higher
costs in the United Kingdom might be re?ective of the
good performance the industry provides in other more
important respects — such as speed and recovery rates.
Nonetheless, the analysis does suggest that the cost of
business closure is worthy of further investigation. The ?rst
stage of any such action would be to identify the relative
importance of different aspects of the cost of closing a
business and how these compare with jurisdictions where
costs appear to be lower. This will help identify the extent
to which costs in the United Kingdom are ‘industry’ costs
or, for instance, costs (inappropriately) incurred by the legal
and regulatory framework. Action could then be targeted
at the areas where costs appear high by international
standards.
5. Liability was an issue raised during our research.
The report identi?ed how the insolvency industry is
already polarised and, in particular, the growth of large
insolvency ?rms. These trends will only be enhanced
by the further impacts of globalisation on the industry.
In an environment in which insolvency advice and
support is being administered by ?rms with in excess
of ?ve thousand people, regulatory framework which is
focused on individual insolvency practitioners may no
longer be ?t for purpose.
The value of the insolvency industry
7
This report examines, quanti?es and considers the current
and future economic signi?cance of the insolvency industry
— in terms of its direct contribution to employment and
national income, its indirect impact through its spending on
suppliers and other so-called ‘multiplier’ effects, and its role in
supporting entrepreneurship and appropriate risk taking.
1 Introduction and background
This report has been produced by centre for economics and
business research ltd (cebr), an independent economics
research consultancy founded in 1992. The study has been
commissioned by the Association of Business Recovery
Professionals (known as ‘R3’), the leading professional
association for insolvency, business recovery and turnaround
specialists in the United Kingdom. Nevertheless, the views
expressed herein are those of the authors only and are based
upon independent research by them.
In this introductory chapter, we ?rst explain terminology that
will be used throughout the report. Second, we describe the
statutory and non-statutory duties of the insolvency industry.
In the third section we explain our research methods. The ?nal
section outlines the structure of the report.
The value of the insolvency industry
8
1.1 De?nitions
In this section we explain terminology that will be used
throughout the report.
‘Insolvency’ is the inability, for whatever reason, of an
individual or entity to pay their debts when due. Legislation
governs what happens when an individual or entity
becomes insolvent; the law differs between corporations
and individuals. Legislation for individuals covers the self-
employed as well as other people; corporate insolvency
law relates to separate legal entities other than individuals
e.g. companies. In this report, we make a further
distinction between ‘business’ insolvency, which includes
both self-employed businesspeople and corporations, and
‘personal’ insolvency, which relate to those individuals who
are not self-employed.
An ‘insolvency practitioner’ is a licensed professional who
is authorised under statute to administer the insolvent
estates of a company or an individual. An insolvency
practitioner can ful?l the roles of an administrative receiver,
a receiver, a liquidator, an administrator, a supervisor of
a corporate voluntary arrangement or a special manager
of a company or the role of a trustee in bankruptcy or the
supervisor of an individual voluntary arrangement for an
individual.
1
The ‘insolvency industry’ comprises of insolvency
practitioners, and their associated support and
administrative staff.
A ‘receiver’
2
is a person that is appointed as a custodian of
an individual’s or corporation’s property by a court of law or
a creditor of the owner, pending a lawsuit or bankruptcy.
A ‘liquidator’
3
is a licensed insolvency practitioner
appointed either by the members, in the case of a
members’ voluntary winding up, or the directors and
creditors, in the case of a creditors’ voluntary winding up,
or by the Court in the case of a compulsory winding up to
administer the estate and distribute the assets after paying
the expenses to the creditors or members as appropriate.
An ‘administrator’
4
is a licensed insolvency practitioner
appointed by the court under an administration order (see
section 1.2) or by the holder of a valid ?oating charge or
by the company or its directors ?ling the requisite notice at
court.
1 Source: R3
2 Philip, Ken, and Kerin Kaminski. ‘Receivership: A Value-Adding Tool’ Secured
Lender, January/February 2007, Vol. 63 Issue 1, pages 30-34,36.
3 Source: R3
4 The Insolvency Service, insolvency terms, 2007
An ‘administrative receiver’
5
is a licensed insolvency
practitioner who is appointed by the holder of a valid ?oating
charge to realise the assets charged for the bene?t of the
debenture holder after meeting the costs and the claims of
the preferential creditors.
A ‘supervisor’
4
is a licensed insolvency practitioner
appointed to supervise the carrying out of a company
voluntary arrangement or an individual voluntary
arrangement.
A ‘trustee’
6
in the insolvency context is the trustee of
a bankrupt’s estate who is authorised under statute to
administer the bankrupt’s estate for the bene?t of his or her
creditors after paying the costs of such administration. The
trustee is usually a member of the Of?cial Receiver’s of?ce
— although, in complicated cases, it is usually a licensed
insolvency practitioner.
‘Discharge from bankruptcy’
7
brings an end to the
restrictions of bankruptcy and releases the bankrupt from
the debts owed at the date the bankruptcy order was made
(with certain exceptions).
A ‘bankruptcy restrictions order’
8
extends the imposition
of bankruptcy on individuals for the period speci?ed in
the order of between two and ?fteen years. An of?cial
receiver can apply to court for a bankruptcy restrictions
order if they believe there has been dishonest, reckless or
culpable behaviour from the bankrupt. It does not affect the
discharge of the debts.
A ‘?xed charge’
9
holder has a charge held over speci?c
assets. The debtor cannot sell the assets without the
consent of the secured creditor or repaying the amount
secured by the charge.
A ‘?oating charge’
10
is held over general assets of a
company. The assets may change (such as stock) and the
company can use the assets without the consent of the
secured creditor until the charge ‘crystallises’ (becomes
?xed). Crystallisation occurs on the appointment of a
receiver, on the presentation of a winding-up petition or as
otherwise provided for in the document creating the charge.
5 Source: R3
6 Source: R3
7 Source: R3
8 The Insolvency Service, freedom of information, ‘technical manual’ Chapter 13,
part 12.
9 The Insolvency Service, Glossary of insolvency terms, 2007
10 The Insolvency Service, Glossary of insolvency terms, 2007
The value of the insolvency industry
9
1.2 Functions of the insolvency practitioner
In this section we discuss the functions of the insolvency
practitioner
11
. First we consider the options that an
insolvency practitioner may administer to a corporation in
?nancial dif?culty. Second, we consider the options for an
individual in ?nancial dif?culty. The majority of these options
require a licensed insolvency practitioner. With a few
options, a practitioner is not necessary by law but is still
likely to be involved in the proceedings. When this is the
case, it is explicitly stated.
Considering the options for a company in ?nancial dif?culty,
one option is ‘liquidation’. There are three types of
liquidation that an insolvency practitioner may administer.
For each of these options a registered insolvency
practitioner is required, by law, to manage the procedure:
a ‘members’ voluntary liquidation’ (or ‘members’ •
voluntary winding up’) is when the shareholders of a
company decide to put it into liquidation, and there are
enough assets to pay all the debts of the company, i.e.
the company is solvent
a ‘creditors’ voluntary liquidation’ is when the •
shareholders of a company decide to put the company
into liquidation, but there are not enough assets to pay
all the creditors, i.e. the company is insolvent
a ‘compulsory liquidation’ is when a court makes an •
order for the company to be wound up (a ‘winding-up
order’) on the petition of an appropriate person, such
as a director or shareholder. Our survey of insolvency
professionals revealed that 88 per cent of their ?rms are
involved in compulsory liquidation
Many insolvent corporations can be saved from liquidation;
there are four possibilities for a company in ?nancial
dif?culty other than liquidation.
First, ‘administration’ is a procedure designed to rescue
companies in ?nancial dif?culty. Once an administration
order has been made by a court, creditors are prevented
from taking predatory action against the company, except
with leave of the court, and the company gains a breathing
space to sort out its affairs. The prime purpose under the
Enterprise Act is to rescue the company but that purpose
is hardly ever invoked. It is usually a better realisation of
the assets than would be the case in a winding up. An
administration can also be used to set up a company
voluntary arrangement. The procedure is managed by a
licensed insolvency practitioner.
11 Information from this section is taken form a variety of sources, such as The
Insolvency Service, R3, The Insolvency Act 1986, The Enterprise Act 2002
Second, ‘administrative receivership’ is when an insolvency
practitioner is appointed as a receiver by a debenture holder
who holds a valid ?oating charge or, more usually, a valid
?xed and ?oating charge over the assets of the company.
The company must be in breach of the terms of its
debenture for the charge-holder to trigger the appointment
and the administrative receiver will seek to realise the assets
charged for the bene?t of the debenture holder after meeting
the costs and the claims of the preferential creditors. That
could be by trading on and selling as a going concern or
rarely, closing the business down and selling the assets on a
piecemeal basis. It is a rarely used tool now and was much
more prevalent ?fteen to twenty years ago.
Our survey of insolvency professionals revealed that 74
per cent of their ?rms are involved in administration and/or
administrative receivership.
Third, a ‘company voluntary arrangement’ (often abbreviated
to ‘CVA’) is a formal arrangement between debtors and
creditors. The arrangement can take any form subject to the
agreement of creditors but normally involves the delayed
or reduced payment of debt, capital restructuring or an
orderly disposal of assets within an agreed timescale. The
company remains under the control of the directors but an
insolvency practitioner supervises the arrangement and pays
the creditors in line with the accepted proposals. The CVA is
often used instead of liquidation as a means of distributing
funds on the conclusion of an administration. For a CVA
to be binding on all the company’s creditors, over 75 per
cent by value of those creditors entitled to vote must vote
in favour of the proposals. This hurdle is one of the reasons
why an administration order is put in place ?rst before
seeking a CVA as the order, once granted, is binding on all
creditors.
Fourth, an ‘informal arrangement’ is where the company
writes to all its creditors to see if a mutually acceptable
agreement can be reached. The agreement is not legally
binding therefore neither party has to honour the agreement.
This could be a disadvantage for the debtor as they are not
protected from creditors pursuing repayment through formal
proceedings at a later date. A disadvantage for creditors
is that they may not have con?dence that repayments will
be made. In addition, the terms of the agreement are not
necessary equitable to all creditors – some may receive
higher undisclosed returns. The advantage of this option
is that the agreement is likely to be less costly than formal
proceedings. An insolvency practitioner is not necessary,
although they would be able to offer advice on the option.
Our survey of insolvency professionals revealed that 62 per
cent of ?rms are involved in advice for businesses and/or
?nance, accounting and legal services.
The value of the insolvency industry
10
An insolvency practitioner will calculate the amount a debtor
can afford to pay and organises a formal arrangement
between the debtor and the creditors. An IVA proposal must
be accepted by in excess of 75 per cent
13
of the creditors
(by value of credit provided). Creditors may receive a higher
return than they would through bankruptcy, although they
will receive less than full repayment of debts as interest
is often frozen and a proportion of the debt is likely to be
written off. An IVA may also allow more time for debtors
to pay off their debts. If repayments under the IVA are not
maintained, the debtor can become bankrupt. Our survey
of insolvency professionals revealed that 85 per cent of their
?rms are involved in individual voluntary arrangements.
There are also currently plans to introduce simple individual
voluntary arrangements
14
(commonly abbreviated to
‘SIVAs’). Current proposals state that SIVA cases would
typically be used by debtors in regular employment who,
after reasonable living expenses, had suf?cient disposable
income (or assets) to enable a dividend to be paid to
creditors in excess of that which would be achieved in
bankruptcy. It is likely a SIVA would only be available for
individuals with debt of no more than £75,000.
13 IVA advisor, IVA: what is a creditors meeting, 2006
14 The Insolvency Service, Improving voluntary arrangements, 2005
The ‘restructuring and turnaround services offered by
insolvency practitioners are often overlooked. Although not
part of the statutory functions of an insolvency practitioner,
our survey revealed that 67 per cent of their ?rms are
involved in restructuring and turnaround.
The results of our survey on processes insolvency
practitioners’ ?rms are involved in is given in Table 1. This
table also makes a distinction between accountancy based
?rms and insolvency specialist ?rms.
Table 1 Processes insolvency practitioners’
organisations are involved in, share of
professional’s ?rms, United Kingdom, 2007
12
Overall
12
Accountancy ?rm Insolvency specialist ?rm
Company Voluntary Arrangement / Members’
Voluntary Liquidation
92% 100% 87%
Compulsory Liquidation 88% 97% 83%
Business Administration/ Administrative
Receivership
74% 88% 61%
Restructuring and turnaround 67% 83% 48%
Finance/ accounting/ legal matters/ advice for
businesses
62% 88% 30%
Number of respondents 109 58 46
Source: cebr survey of R3 members, 2007
We now turn to options for individuals in ?nancial dif?culty.
If an individual becomes insolvent, they may claim
‘bankruptcy’ or take out an ‘individual voluntary
arrangement’.
An individual may be forced into bankruptcy by a
creditor or opt for bankruptcy themselves. A ‘Trustee in
Bankruptcy’ is appointed, which is either an insolvency
practitioner or a civil servant (an ‘Of?cial Receiver’). The
trustee’s role is to realise the assets in the bankrupt’s
estate and distribute the proceeds among the creditors.
The trustee will remain in control of the debtors assets until
the bankrupt is discharged, which is usually after one year.
The equivalent of bankruptcy in Scotland is sequestation.
Our survey of insolvency professionals revealed that 89 per
cent of their ?rms are involved in individual bankruptcy.
An individual voluntary arrangement (commonly known
by its abbreviation ‘IVA’) is an alternative to bankruptcy. It
allows individuals to avoid certain constraining penalties
that come with bankruptcy, for example the individual may
retain more assets than they would through bankruptcy.
12 Includes law ?rms and ?rms which classi?ed themselves as ‘other’, the number
of responses from these ?rms was too low for separate analysis of these types
of ?rms
The value of the insolvency industry
11
with statutory debt relief also prepare debt management
plans. This can be seen in Table 2. This suggests a
current emphasis for insolvency practitioners on statutory
procedures.
The survey results also reveal that 65 per cent of insolvency
professionals’ ?rms are involved in general advice on
?nancial and/or legal matters of individuals. The role of
the industry in helping individuals avoid insolvency is often
overlooked.
A ?nal option for a creditor (but of limited value where
the debtor is in serious ?nancial dif?culty) is a ‘county
court judgement’. If one or more creditors obtain a court
judgment against a debtor, a county court may make an
administration order. This is a court-based procedure
whereby the debtor makes regular payments to the court to
pay towards the debt. The court will take a small percentage
from the money paid towards its costs. If not paid regularly,
the order could be cancelled and the debtor may become
subject to the same restrictions as someone who is
bankrupt. This process is dealt with by the courts and an
insolvency practitioner is not necessary.
Individual processes that ?rms are involved in are not
signi?cantly different when comparing accountancy ?rms
and insolvency ?rms. However, there is some evidence
that insolvency specialists are more involved in individual
voluntary arrangements. More than nine out of ten (96 per
cent) of insolvency specialist ?rms are involved in individual
voluntary arrangements, compared to 93 per cent of
accountancy ?rms. The accountancy ?rms are likely to have
more involvement in bankruptcy, with 95 per cent of ?rms
involved in this procedure. Out of the insolvency specialists,
89 per cent are involved in personal bankruptcy.
Table 2 Processes insolvency practitioners’
organisations are involved in, share of
practitioner’s ?rms, United Kingdom, 2007
In Scotland, the process that is largely equivalent to an
IVA is a ‘protected deed trust’. The main difference with a
deed trust is that creditors cannot negotiate the proposal
the insolvency practitioner draws up. This can save time
and money but can also be less ?exible than an IVA.
If proposals are rejected, the individual is put through
sequestration.
We now discuss the non-statutory proceedings an
insolvency practitioner may use to aid an individual in
?nancial dif?culty.
For an over indebted individual, there are further options
that an insolvency practitioner may help to organise
that are not formal insolvency procedures. The most
frequently used option is a ‘debt management plan’ (often
abbreviated to ‘DMP’). This is similar to an individual
voluntary arrangement as it involves a compromise
between the debtor and creditors, but it is not legally
binding. As it is not a statutory form of debt relief, an
insolvency practitioner is not needed legally to negotiate
between the creditors and debtor.
The main disadvantages to debtors are that DMPs are not
binding on the creditors, they offer no certain compromise
on the debt level and they can be open ended in terms
of when full repayment might be made. The advantage
for a debtor is that they carry no stigma whereas both
bankruptcy and, to a lesser extent, IVAs do. If the debtor
fails to make repayments, they are likely to need an IVA
or a bankruptcy order. A creditor may prefer a DMP to
statutory forms of debt relief because the debt is not seen
as a bad debt and does not have to be written off in their
accounts, plus they are cheaper to set up and administer.
According to our survey of insolvency professionals, twenty
per cent of respondent’s organisations that deal
Overall Accountancy ?rm Insolvency
specialist ?rm
Individual bankruptcy 89% 95% 89%
Individual Voluntary Agreements 85% 83% 96%
Debt management plans 20% 19% 22%
General advice on ?nancial and/or legal matters for individuals 65% 72% 59%
Number of respondents 109 58 46
Source: cebr survey of R3 members, 2007
The value of the insolvency industry
12
The survey was issued on 19 September 2007 and closed on
15 October 2007. During that time period we received 169
responses: 109 were insolvency practitioners; nineteen were
turnaround professionals; ?fteen were a student member and/
or in training; 23 were none of the above but worked in the
insolvency industry; while three were retired or inactive in the
insolvency industry and were not asked any further questions.
More details of our survey analysis are in section 6.1. The
survey responses are in section 6.9.
1.4. Structure of this report
In this section we outline the structure of this report.
In the next chapter, we consider the structure of the industry,
how it has developed over time and the people who work
within it.
In the third chapter, we quantify the economic bene?ts of the
insolvency industry. First, we identify the direct contribution
of the insolvency sector to the United Kingdom using
conventional measures such as employment and gross
value added. Second, we quantify the indirect contribution
through its employees’ spend and acquiring inputs from
other industries. Third, we look at how the industry uses its
expertise to save businesses and their employees. Fourth, we
investigate how the industry creates an environment that is
conducive to entrepreneurship and appropriate risk taking.
The ?fth chapter considers the future of the insolvency
sector. We ?rst discuss the main drivers of the insolvency
industry. Second, we consider the prospects for the economic
contribution of the insolvency industry. Third, we analyse the
prospects for individual insolvency. Fourth, the prospects for
corporate insolvency are examined in more detail. In the ?fth
section, we consider the long term challenge of globalisation.
The chapter concludes with suggested areas of action.
The sixth chapter contains the explanatory notes and technical
methodologies. We provide nine notes:
Analysing the survey results •
Determining the employment in the insolvency •
industryMeasuring the indirect economic contribution of the
insolvency industry
Calculating the number of jobs saved by the industry •
Analysing the wider economic contribution of the insolvency •
industry
Forecasting individual and corporate insolvencies •
The industry experts we interviewed •
Bibliography of literature used in the compiling of this report •
The survey of the insolvency professionals and their •
responses
1.3 Research methods
In this section we discuss the research methods
15
we used
to investigate the insolvency industry.
This report is based on a thorough programme of research
by cebr including a literature review, quantitative analysis of
of?cial data, interviews with industry experts and a survey
of insolvency professionals. We consider these research
methods in turn.
We undertook a literature review to assess existing
evidence of how the insolvency industry supports the
United Kingdom economy and to assist our overall
development of research methods. A bibliography can be
found in Section 6.1.
We interviewed seven industry experts
16
. Experts were
from both the private and public sectors. We interviewed
regulators, insolvency practitioners and a representative
from the insolvency practices’ council. We discussed the
following topics:
What is the ‘insolvency industry’? •
The bene?ts and weaknesses of the United Kingdom’s •
insolvency industry
How the sector has developed over time and is •
expected to develop
Opportunities that will allow this to happen •
Risks that may prevent this from happening •
A quantitative analysis of of?cial data is used to estimate
the direct and indirect contribution of the insolvency
industry on the United Kingdom economy, to compare
insolvency regimes internationally and forecast future
trends. A more detailed explanation of the methods we
employed is in Section 6.1.
We also undertook an internet survey of members of R3.
This was to determine, with the assistance of of?cial data:
the size of the industry in terms of employment and •
turnover
details of people who work in the industry, including the •
hours they work, the work they do, remuneration
the region in which insolvency professionals, and their •
organisation, are based
the industry’s growth and expected growth •
opportunities and threats to the growth of the insolvency •
industry
strengths and weaknesses of the industry •
15 More detailed methodologies are in Chapter 6
16 A list of the experts interviewed is in section 6.7
The value of the insolvency industry
13
2 An overview of the industry
In this chapter, we consider the structure of the industry, how
it has developed over time and the people who work within it.
The key ?ndings are:
1. The number of corporate failures has been relatively stable
since 1996, although there has been a shift towards the
rescue of companies rather than liquidation. This can partly
be explained by legislative changes, which encouraged
administration. There is evidence that this was part of a
pre-existing trend
2. The number of individual insolvencies began to rise sharply
in 2004 and this cannot be explained by broader trends
in the macroeconomy alone. The majority of the growth
was through increasing numbers of individual voluntary
arrangements and more personal bankruptcies, rather
than insolvencies of self employed businessmen. The
three main drivers were: The Enterprise Act; heightened
awareness of insolvency options; and increasing consumer
debt
3. The insolvency industry is centred on 1,744 insolvency
practitioners, which are based in 714 ?rms. In total, the
industry accounts for approximately 12,700 jobs. This
includes insolvency practitioners, assistant solicitors and
accountants, administrative and reception staff
4. The insolvency industry has presence across the United
Kingdom, although there is a high share of practitioners in
London, the South East and the North West
5. The average insolvency practitioner is 46 years old, male
and is a head of department or manager; 75 per cent
of practitioners have quali?cations to A-levels equivalent
standard or above, and 57 per cent have a university
degree. The insolvency practitioner works an average of 42
hours a week and earns £110,000 a year. In addition, 72
per cent earn some form of additional bene?ts; 39 per cent
receive a bonus
6. Women are becoming a growing and signi?cant part of the
industry; 47 per cent of people under 35 years old in the
industry are female
The value of the insolvency industry
14
Third, it changed the entry routes into administration
19
.
Under the original administration regime introduced by the
Insolvency Act 1986, administration commenced only with
the making of a court order. The Enterprise Act made it
possible for an administrator to be appointed without a court
order. The aim of which was to eliminate the need for, and
costs associated with, a court application and hearing. In
addition, ?oating charge-holders, a company or its directors
became entitled to appoint an administrator without seeking
a court order, subject to certain restrictions
20
. In addition, the
2002 act introduced other measures to reduce the use of
court time in insolvency cases.
Fourth, it restricted the right of holders of ?oating
charges created after 15 September 2003 to appoint an
administrative receiver. This was aimed at encouraging
administration rather than receivership. In a receivership,
the insolvency practitioner has primary responsibility to the
creditor that appointed him. Administration, on the other
hand, is a collective procedure with more equal treatment of
creditors.
2.2 Overall trends in insolvency
In this section, we discuss the trends in insolvency. This is
to understand the main drivers of the industry and how the
industry’s environment has changed over time.
Overall, the economic cycle is the main driver of the
number of insolvencies. Figure 1 shows how the number
of insolvencies has changed since 1989. It contains
the number of individual insolvencies (bankruptcies and
individual voluntary arrangements), all corporate failures and
annual real growth in national gross domestic product. In
this graph, we take corporate failures to include: compulsory
liquidations; creditors’ voluntary liquidations; administrative
receiverships; administration orders; and company voluntary
arrangements.
19 The Insolvency Service, Enterprise Act 2002 – corporate insolvency provisions:
Evaluation report, 2008 and Frisby, S, ‘Report of insolvency outcomes’, 2006
20 Restrictions include: In the case of a company or its directors, the company is
or is likely to become unable to pay its debts. A ?oating charge-holder seeking
to appoint an administrator must give appropriate notice to the holder of a prior
?oating charge unless they have consented to the appointment. Similarly, a
company or its directors are required to provide a ?oating charge-holder with
prescribed notice.
In this chapter, we examine the environment in which the
insolvency industry is based. We consider the businesses
and the employees working in the insolvency industry.
We ?rst discuss the main legislative changes to the
insolvency industry. This is to aid understanding of our
second topic – the overall trends in insolvency. In the third
section, we discuss corporate insolvency trends in more
detail. In the fourth section, we discuss trends in personal
insolvency in more detail. Fifth, we examine the size and
structure of the industry, discussing turnover and growth of
the insolvency industry. In the ?nal section we examine the
insolvency practitioners themselves.
2.1 Main legislative changes
In this section we discuss the main legislative changes
to the laws that govern insolvency, and therefore have a
signi?cant impact on the insolvency industry. Since The
Insolvency Act 1986, there has been one main legislative
change: and The Enterprise Act 2002.
The main legislative change in The Insolvency Act
1986 was the introduction of new rescue procedures:
company voluntary arrangements and administrations for
corporations, and individual voluntary arrangements for
individuals.
Implemented in 2004, The Enterprise Act 2002
incorporated four main changes.
First, The Enterprise Act reduced the automatic discharge
period
17
for a bankrupt to twelve months from three years.
The repayment period was left unchanged at three years.
This was intended to reduce the stigma of bankruptcy,
whilst not reducing creditors’ returns.
Second, the new legislation established bankruptcy
restriction orders
18
with the aim of further discouraging
culpable insolvents and making the process for dealing
with them more ef?cient. Previously, if insolvency
practitioners felt there had been misconduct, the only
option was to prosecute. With bankruptcy restriction
orders, a prosecution is not necessary and an insolvent
can be put under certain restrictions for a period between
two and ?fteen years.
17 De?nition in section 1.1
18 De?nition in section 1.1
The value of the insolvency industry
15
2.3 Trends in corporate insolvency
In this section, we examine trends in corporate failure.
The number of corporate failures has been relatively stable
since 1996. Within this time period, there was some growth
of business failures during the dot-com crash, as can be
seen in Figure 2. The number of failures rose to 19,800
in 2002 from 17,300 in 2000. This was followed by a fall
in failures as the economy recovered; failures fell back to
17,400 in 2003.
We now look at the trends in the different types of corporate
failures. The number of each type of failure is given in Figure
2 and each type of failure as a share of total failures is given
in Table 3. There are six types of business failure examined:
Creditors’ voluntary liquidations •
Compulsory liquidations •
Receivership appointments •
Administrator appointments •
In administration •
Company voluntary arrangements •
Figure 2: Number of corporate failures
21
, England
and Wales, thousands
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
21 Administration may lead to liquidations; as such there is a possibility of an
element of double counting in these ?gures. Therefore the rise in business failures
in 2005 and 2006 that is due to companies in administration should be viewed
with care.
Figure 1: Number of insolvencies, thousand
(England and Wales) and real GDP growth,
annual percentage change, (United Kingdom)
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007 and Of?ce of National Statistics, 2007
As Figure 1 illustrates, a change in the
number of insolvencies tends to follow
a turn in the economy after a period of
approximately one year. The lag occurs
because it takes time for businesses and
individuals to use up existing resources and
for ?nancial dif?culty to become insolvency.
The recession in the early 1990s caused a
large increase in insolvencies. As economic
growth recovered in 1994 the number of
insolvencies moderated. After 1995 there
was a period of economic stability and
the number of insolvencies remained at a
modest level until 2002. However in 2003,
although the economy remained robust
and corporate failures low, the number of
personal insolvencies began to increase
rapidly.
We now discuss trends in corporate and
individual insolvencies in turn.
0
10
20
30
40
50
60
70
80
90
100
110
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
-2%
-1%
0%
1%
2%
3%
4%
5%
Total company failures (left scale) Personal insolvencies (left scale)
Real GDP growth (right scale)
Recession
and
r ecover y
Stable economic
gr owth
A fter
2002
0
5
10
15
20
25
30
35
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
Creditors'
Voluntary Liquidations Compulsory Liquidations
Receivership Appointments In
Administration (Enterprise Act 2002)
Company Voluntary Arrangements Administrator Appointments
The value of the insolvency industry
16
Table 3 Share of total business failures,
percentage, England and Wales
Year Creditors
Voluntary
Liquidations
Compulsory
Liquidations
Receivership
Appointments
Administrations Company Voluntary
Arrangements
1989 59.8% 37.3% 0.0% 1.3% 0.4%
1990 58.4% 38.5% 0.0% 1.4% 0.4%
1991 44.6% 27.7% 25.9% 0.7% 0.5%
1992 44.0% 29.2% 25.5% 0.5% 0.2%
1993 47.2% 31.2% 20.3% 0.4% 0.5%
1994 47.8% 31.1% 18.3% 0.8% 1.2%
1995 48.8% 29.9% 17.5% 0.9% 2.0%
1996 49.2% 29.8% 15.9% 1.2% 2.7%
1997 50.9% 30.6% 11.9% 1.3% 4.1%
1998 49.7% 32.5% 10.7% 2.1% 2.9%
1999 52.6% 30.2% 9.4% 2.6% 2.8%
2000 54.1% 28.4% 9.2% 2.5% 3.2%
2001 54.5% 24.8% 10.1% 3.7% 3.2%
2002 50.9% 31.5% 7.8% 3.3% 3.3%
2003 51.4% 30.1% 7.2% 4.3% 4.2%
2004 49.9% 30.0% 5.7% 10.5% 3.9%
2005 46.8% 32.0% 3.6% 13.8% 3.7%
2006 43.3% 30.4% 3.3% 20.0% 3.0%
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
Growth in the number of creditors’ voluntary liquidations,
compulsory liquidations and receivership appointments
have all followed the main trend in overall insolvencies, as
seen in Figure 3. In contrast, the numbers of administrator
appointments, companies in administration and company
voluntary arrangements, taken together, have been on a
general upwards trend. This can be seen in Figure 4.
Creditors’ voluntary liquidations make up the largest share
of corporate failures, contributing 51 per cent in 1997. Its
share rose to 55 per cent in 2001 but has since dropped to
43 per cent by 2006. The share of compulsory liquidations
has remained between 29 per cent and 33 per cent of
total failures over the period, although it dropped slightly
to 25 per cent in 2001. The number of company voluntary
arrangements as a share of all corporate failures has been
stable throughout the period 1998 to 2006, remaining
between three per cent and four per cent.
The number of receivership appointments grew at a much
faster pace during the recession and fell sharply after 1992.
As share of business failures, receivership appointments
fell from 10.1 per cent in 2001 to 3.3 per cent in 2006.
During this time the Enterprise Act 2002 was introduced.
However, there was already a declining trend. This may
have been because creditors turned to rescue rather than
receivership in the pursuit for higher returns.
The number of administrations has risen sharply as
the Enterprise Act made changes to the administration
process with effect from 15 September 2003 and provided
new entry routes. Since its implementation the number of
businesses in administration has grown robustly, to twenty
per cent in 2006 from under four per cent in 2002.
Overall, there has been a shift towards the rescue of
companies rather than liquidation. This can partly be
explained by legislative changes, which encouraged
administration. Additionally, there is evidence that this
was part of a pre-existing trend. Experts we interviewed
suggested that this was because creditors themselves saw
the bene?ts of rescuing a corporation earlier – giving them
a higher rate of return – and therefore pushed for rescue
rather than liquidation.
The value of the insolvency industry
17
Figure 3: Number of business failures, England
and Wales, thousands
Figure 4: Number of business failures
22
, England
and Wales, thousands
22 Administration may lead to liquidations; as such there is a possibility of an
element of double counting in these ?gures. Therefore the rise in business
failures in 2005 and 2006 that is due to administrations should be viewed with
care.
0
2
4
6
8
10
12
14
16
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
Creditors' Voluntary Liquidations Compulsory Liquidations Receivership Appoint ments
Source: Insolvency
Service, Statistical
release: insolvencies in
the third quarter 2007,
November 2007
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
Administration Company Voluntary Arrangements
Source: Insolvency
Service, Statistical
release: insolvencies in
the third quarter 2007,
November 2007
The value of the insolvency industry
18
An important change that has occurred since 2003 is the
type of person in ?nancial dif?culty. Much of the legislation
on bankruptcies and IVAs was devised with the needs of
the self-employed businessman in mind. However, ‘other
individuals’, namely consumers, have become the main
users. We have de?ned insolvencies of ‘other individuals’
as personal insolvencies. The number of self-employed
persons becoming bankrupt has remained fairly stable since
1998. Meanwhile the number of personal insolvencies has
risen strongly. This can be seen in Figure 6.
Figure 6: Number bankruptcies by type of debtor,
thousands, England and Wales and unsecured
credit, percentage of disposable income, United
Kingdom, 1989-2006
Source: Insolvency Service and parliament publications, 2007
The number of bankruptcies has more than trebled between
1998 and 2006. The number of self-employed individuals
that have become bankrupt has remained between 8,800
and 10,900 per annum. In 1998 the majority (53 per cent)
of individual bankruptcies was people classi?ed as self-
employed; this fell to seventeen per cent in 2006.
2.4 Trends in personal insolvency
We now consider the trends in individual insolvency and
the type of person becoming insolvent.
Total individual insolvencies comprise bankruptcy orders
and individual voluntary arrangements (IVAs).
Until 2003 the number of individual insolvencies grew at
a relatively subdued pace. The shares of bankruptcies
and IVAs over this period remained stable. During this
period IVAs contributed between twenty to 27 per cent of
individual insolvencies.
The number of individual insolvencies began to rise sharply
in 2004, by 31 per cent, as seen in Figure 5. The total
number of insolvencies increased from 46,700 in 2004 to
107,000 in 2006.
Figure 5: Number personal insolvencies,
England and Wales, thousands, 1983-2006
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007 and cebr analysis, 2007
Part of the rise in individual insolvencies can be explained
by the implementation of The Enterprise Act 2002 as it
reduced the stigma of insolvency. However, insolvencies
began to rise at a faster rate before the implementation
of the act. The sharp rise in personal insolvencies cannot
be explained by broader trends in the macroeconomy: as
Figure 1 shows, the economy grew consistently around its
long term trend of 2 ¼ to 2 ½ per cent per annum through
this period.
To understand the reason behind the rise in individual
insolvencies we examine the type of insolvencies that
occurred. In particular, we examine how the type of person
becoming bankrupt has changed and the rise in individual
voluntary arrangements.
0
20
40
60
80
100
120
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
Bankruptcy Orders Individual Voluntary Arrangements
Enterprise Act
0
10
20
30
40
50
60
70
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
0%
5%
10%
15%
20%
25%
30%
Personal bankruptcies (Left scale)
Self-employed bankruptcies (Left scale)
Unsecured credit as a share of disposible income (Right scale)
The value of the insolvency industry
19
2.5 The size and structure of the industry
We now consider the overall structure of the industry.
The insolvency industry is centred on licensed insolvency
practitioners, of which there are 1,744 in the United
Kingdom
26
. They are licensed by one of nine regulatory
bodies:
Institute of Chartered Accountants in England & Wales •
(ICAEW)
Insolvency Practitioners Association (IPA) •
Association of Chartered Certi?ed Accountants (ACCA) •
Law Society of England and Wales (LS) •
Institute of Chartered Accountants of Scotland (ICAS) •
Insolvency Service (part of the Department for Business, •
Enterprise and Regulatory Reform) on behalf of the
Secretary of State (SS)
Institute of Chartered Accountants in Ireland (ICAI) •
Law Society of Scotland (LSS) •
Law Society of Northern Ireland (LSNI) •
The numbers of insolvency practitioners licensed by each of
the nine bodies are presented in Figure 7.
Figure 7 Number of insolvency practitioners by
licensing body, United Kingdom, 2007
Source: The Insolvency Service, Law Society of Northern Ireland, speci?cally
requested, October 2007
26 The Insolvency Service, Law Society of Northern Ireland, speci?cally
requested, 2007
The number of individual voluntary arrangements has
also grown rapidly over this time period. The number of
individual voluntary arrangements more than doubled
in 2006 (growing 118 per cent). The rise in personal
bankruptcies and our discussions with industry experts
suggest
23
this rise was also due to the increasing demand
of insolvency procedures by consumer debtors.
There have been three main drivers of the rise in consumer
insolvencies:
Increasing consumer debt •
The Enterprise Act 2002 •
Heightened awareness •
First, the amount of consumer debt has increased, led by
the decreasing cost and rising availability of credit. This
was the reason given for individual insolvency growth in
the majority of interviews. However, as can be seen from
Figure 6, unsecured credit as a percentage of disposable
income has not risen as strongly as insolvencies. In
addition, the affordability
24
of debt has risen at a rate that is
even slower.
Second, The Enterprise Act 2002 reduced some of
the constraints of bankruptcy. This is likely to have
contributed to the rise. Similarly, if the stigma associated
with bankruptcy falls
25
, people are more willing to declare
themselves bankrupt.
Third, the education of the public of individual voluntary
arrangements – through media coverage, advertising
and word of mouth – has led to a heightened awareness
among consumers. This is likely to have contributed to the
growth in personal insolvencies.
23 Additional evidence came from research by Michael Green, which claimed that
the majority of individual voluntary arrangements are in response to excessive
unsecured consumer debt. The report suggested ‘Business debt generated
IVAs now account for probably less than 5-10% of IVAs proposed, approved
or registered. This pattern has prevailed since1994’. Source: The Insolvency
Service Short form report ‘A summary of the principal ?ndings an conclusions’
24 Historically low interest rates have meant re-payment of debt remained at
affordable levels
25 Gross, D; Souleles, N (2002) ‘An Empirical Analysis of Personal Bankruptcy
and Delinquency’ The Review of Financial Studies 15 (1) 319-347; White, M
(1997) ‘Why Don’t More Households File for Bankruptcy?’ Journal of Law,
Economics and Organization 14 (2); Gropp, R; Scholz, J; White, M (1997)
Personal Bankrupcy and Credit Supply and Demand The Quarterly Journal
of Economics 112 (1); 217-251; The Insolvency Service, (2002) Attitudes to
Bankruptcy;
0
100
200
300
400
500
600
700
800
ICAEW IPA ACCA LS ICAS SS ICAI LSS LSNI
The value of the insolvency industry
20
We now examine the ?rms that employ insolvency
practitioners in more detail. We ?rst discuss the type of ?rms
in which insolvency practitioners work, second their turnover
and third the region in which they operate.
The results from our survey of insolvency practitioners
suggest that almost half of insolvency practitioners (49 per
cent) work in accountancy ?rms. Approximately 39 per cent
work for insolvency specialist ?rms. Only nine per cent work
in law ?rms, with the balance accounted for by ‘other ?rms’.
Considering the size of ?rms where insolvency practitioners
operate, some within the industry believe it has become
polarised, with most activity conducted by either large
practices or relatively small ones. Indeed, nearly a third
(30 per cent) of all insolvency practitioners reported the
insolvency-related turnover in their ?rm was in excess of
£10 million (although some of these insolvency practitioners
will be in the same business). Meanwhile, 27 per cent of
insolvency practitioners reported turnover of less than
£500,000. This can be seen in Figure 9.
Figure 9 Turnover of insolvency ?rm, share of
employment, United Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars.
Standard error bars are shown to give a level of accuracy. An explanation is
given in section 6.1.
A network of staff is required to support the insolvency
practitioners and their work. We estimate that, in total,
the industry accounts for 12,700 jobs
27
. This includes:
insolvency practitioners; assistant solicitors and
accountants; and administrative and reception staff.
We de?ne those that work in the insolvency industry as
insolvency practitioners plus those who work within the
insolvency business unit.
There are other people actively involved in the insolvency
sector which are not included in our de?nition. These
include: the insolvency specialist departments within banks
and other lending institutions; asset disposal employees;
debt collectors; people who create and distribute
insolvency specialist information technology software
packages; pension specialists; and specialist insolvency
judiciary.
We now discuss the ?rms that the insolvency practitioners
work for.
There are 714 ?rms
28
in Great Britain that employ licensed
insolvency practitioners. The majority of ?rms (71 per
cent) have only one licensed practitioner; a further ?fteen
per cent of ?rms employ two practitioners. Four employ
50 to 99 practitioners; and one ?rm employs over 100
practitioners. This is shown in Figure 8.
Figure 8 Number of insolvency practitioners
in each insolvency industry ?rm,
Great Britain, 2007
Source: The Insolvency Service, specially requested, 2007
27 Based data from company accounts, The Insolvency Service the Of?ce of
National Statistics and corroborated by our survey of insolvency practitioners.
A full methodology is contained in the technical notes, section 6.2.
28 The Insolvency Service, speci?cally requested
0
100
200
300
400
500
600
1 2 to 5 6 to 10 11 to 20 Above 21
Number of insolvency practitioners
N
u
m
b
e
r
o
f
f
i
r
m
s
0%
5%
10%
15%
20%
25%
30%
35%
Below
£500,000
Between
£500,000 and
£1 million
£1 million to
£2 million
£2 million to
£10 million
Over £10
million
The value of the insolvency industry
21
According to our survey of insolvency practitioners, the
overall rate of turnover growth of the insolvency sector
has been twenty per cent over the last ?ve years. This is
equivalent to a per annum growth rate of a little under four
per cent every year. This compares to an average rate of
turnover growth of ?ve per cent in the accountancy sector
between 2002 and 2005
29
.
Turnover growth in accountancy ?rms and of insolvency
specialist ?rms has been at a similar pace, according to
survey results, as seen in Figure 11. The average rate of
growth of an accountancy ?rm has been twenty per cent
over the last ?ve years and, for insolvency specialist ?rms,
the growth rate has been 22 per cent.
29 Of?ce of National Statistics, Annual Business Inquiry, 2007
This polarisation is not a unique feature of the insolvency
industry; instead it is likely to be a re?ection and a result of
broader trends in accountancy and the wider economy.
Indeed, it is the accountancy ?rms that have the high
turnover. Within accountancy ?rms, more than half of
respondents (53 per cent) reported that their ?rm’s
insolvency related turnover was over £10 million (some
of these respondents are likely to be within the same
accountancy ?rm) while only ten per cent reported turnover
of less than £500,000. In contrast, only twelve per cent of
insolvency specialists and law ?rms reported insolvency
related turnover to be greater than £10 million and 36
per cent of these ?rms reported turnover to be less than
£500,000. These results can be seen in Figure 10.
Figure 10 Turnover of insolvency ?rms by main
activity of ?rm, share of employment, United
Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
0%
10%
20%
30%
40%
50%
60%
70%
Below
£500,000
Between
£500,000
and £1
million
£1 million to
£2 million
£2 million to
£10 million
Over £10
million
Insolvency specialist Based in a law firm
Based in an accountancy firm
The value of the insolvency industry
22
Figure 11 Growth in turnover over last ?ve years
by type of ?rm30, share of respondents, United
Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
We now consider the regions in which the insolvency
industry has presence.
The insolvency industry has a presence across the United
Kingdom with at least 100 insolvency practitioners in
most regions. The exceptions are the North East (with
an estimated 21 practitioners), Wales
31
and Yorkshire
and the Humber (where we estimate there are just under
100). There is, though, a disproportionately high share of
practitioners in London, the South East and the North West
(see Figure 12) even after taking account of the relative size
of these regions (see Figure 13).
30 Law ?rms and ‘other ?rms’ are not included separately as the number of
responses was too low to provide an accurate gauge of growth in these types
of ?rms, although they are included in the overall ?gures.
31 The number of responses from Wales was too low for reliable estimates to be
made
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Overall Based in an accountancy firm Based in an insolvency specialist fir m
Fallen by
50% or
more
Fallen
between
10% and
49%
Fallen
between
1% and 9%
No
change
Grown
between
10% and
49%
Grown
between
10% and
49%
Grown by
50% or
more
The value of the insolvency industry
23
Figure 14 Regions where there are of?ces, share
of respondent’s ?rms with of?ce in region, 2007
Source: cebr survey of R3 members, 2007
This masks regional variation in the type of ?rm where the
insolvency practitioner is based. Large accountancy ?rms
tend to have an of?ce in each of the regions of the United
Kingdom, while law ?rms tend to be based in London.
Although there are insolvency specialists across the United
Kingdom, there is a disproportionately high share in the
North West. This can be seen in Table 4.
Figure 12 Region in which insolvency
practitioner is based
32
, share of insolvency
practitioners, United Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
Figure 13 Number of insolvency practitioners in
each region
33
per million of the region’s population,
2007 (using 2006 population estimates)
Source: cebr survey of R3 members, 2007, and Of?ce of National Statistics
population estimates, 2006
The insolvency industry also has of?ces throughout
the United Kingdom — although, again, there is a
concentration in London, the South East and the North
West. Almost 50 per cent of respondents reported that
their ?rm has an of?ce in central London; and nearly 40 per
cent of respondents stated their ?rm has an of?ce in the
North West (see Figure 14).
32 The number of responses from Northern Ireland was too low for reliable
estimates to be made
33 The number of responses from Northern Ireland was too low for reliable
estimates to be made
0%
5%
10%
15%
20%
25%
C
e
n
t
r
a
l
L
o
n
d
o
n
O
u
t
e
r
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
0
10
20
30
40
50
60
70
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
0%
10%
20%
30%
40%
50%
60%
C
e
n
t
r
a
l
L
o
n
d
o
n
O
u
t
e
r
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
W
a
l
e
s
S
c
o
t
l
a
n
d
N
o
r
t
h
e
r
n
I
r
e
l
a
n
d
O
u
t
s
i
d
e
t
h
e
U
n
i
t
e
d
K
i
n
g
d
o
m
The value of the insolvency industry
24
Table 4 Regions where of?ces are based, share
of organisations with an of?ce in area, 2007
34
Region Accountancy ?rm Insolvency specialist Law ?rm
34
Central London 73% 24% 57%
Outer London 37% 20% 7%
South East 52% 27% 7%
South West 43% 20% 0%
East Midlands 47% 14% 14%
West Midlands 51% 18% 14%
East England 44% 12% 7%
North West 49% 36% 14%
North East 43% 11% 7%
Yorkshire and Humberside 44% 12% 7%
Wales 34% 12% 7%
Scotland 52% 17% 7%
Northern Ireland 38% 3% 0%
Outside the United Kingdom 34% 9% 21%
Number of respondents 73 66 14
Source: cebr survey of R3 members, 2007.
2.6 The insolvency practitioners
In this section, we consider the insolvency practitioners
themselves.
We consider the following topics in more detail, in turn:
The demographics of insolvency practitioners •
The earnings of, and hours worked by, practitioners •
Insolvency practitioners’ education and quali?cations •
Although 79 per cent of insolvency practitioners are male,
women are becoming a growing and signi?cant part of the
industry. The average insolvency practitioner is 46 years
old. However, half of insolvency practitioners under the age
of 35 are female. Within the females, seventeen per cent
are less than 35 years of age; this compares with ?ve per
cent of males. The spread of ages for men and women is
shown in Figure 15.
34 The number of responses from insolvency practitioners based in law ?rms is
not high enough for regional estimates to have a high level of con?dence
Figure 15 Age and gender of insolvency
practitioners, United Kingdom, 2007
Source: cebr survey of R3 members, 2007, with standard error bars (see
section 6.1)
Of the female insolvency practitioners, there was a
relatively high share (22 per cent) in a top role (chief
executive of?cer/ managing director / executive chairman)
given the lower average age of women. These results can
be seen in Table 5.
0%
10%
20%
30%
40%
50%
60%
70%
25-34 34-44 45-54 55-64 Over 65
Male Female
The value of the insolvency industry
25
Male respondents to our survey typically earned more than
the female respondents. Almost three-quarters of male
insolvency practitioners (74 per cent) earn over £70,000
compared to 23 per cent of women (see Figure 16). These
differences may, though, re?ect the variations in average
age, experience and hours worked.
Earnings also vary by region. Average gross earnings in the
South West and Wales are likely to be less than £100,000 a
year (78 per cent of practitioners in these regions earn less
than £100,000). However, in the other regions and countries
of the United Kingdom, half of insolvency practitioners earn
more than £100,000 (see Figure 17).
Figure 17 Gross basic annual earnings, by
region, percentage of practitioners,
Great Britain
35
, 2007
Source: cebr survey of R3 members, 2007 with standard error bars (see
section 6.1)
35 Due to the number of responses, we were unable to disaggregate information
more than in this ?gure. Similarly, there were not enough responses from
practitioners in Northern Ireland to include it as a region. Information Yorkshire
and Humberside is included in the North and Scotland.
Table 5 Job titles of insolvency practitioners,
percentage of respondents, 2007
Job title Male Female Overall
Chief executive of?cer/ managing director /
executive chairman
31% 22% 29%
Non-executive director / main board director/ director 17% 22% 18%
Head of department / Manager 34% 39% 35%
Other 15% 9% 14%
– of which classi?ed ‘partner’ 15% 9% 14%
Number of respondents 86 23 109
Source: cebr survey of R3 members, 2007
Figure 16 Gross basic annual earnings by
gender, percentage of insolvency practitioners,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007 with standard error bars (see
section 6.2)
We turn to the remuneration of insolvency practitioners.
The average insolvency practitioner has gross annual
earnings of £110,000 a year. In addition, 72 per cent earn
some form of additional bene?ts; 39 per cent receive a
bonus. Earnings and additional bene?ts are discussed in
turn.
Over two-?fths (41 per cent) of insolvency practitioners
responding to our survey reported earnings of over
£100,000 a year. Thirteen per cent of practitioners earn
over £200,000 a year; 49 per cent earned between
£45,000 and £100,000 annually.
0%
10%
20%
30%
40%
50%
60%
Less than £44,999 £45,000 to
£69,999
£70,000 to
£149,999
More than
£150,000
Male Female
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
London South and Wales Midlands and East
of England
North and
Scotland
Less than £100,000 Over £100,000
The value of the insolvency industry
26
Figure 18 Average gross annual earnings by type
of ?rm, share of insolvency practitioners, United
Kingdom, 2007
Source: cebr survey of R3 members, 2007
Table 6 Additional bene?ts of insolvency
practitioners, share, United Kingdom, 2007
Additional bene?t Overall Based in an
accountancy ?rm
Based in an insolvency
specialist ?rm
A bonus 39% 50% 24%
Pension scheme 41% 52% 30%
Medical insurance 54% 60% 43%
Life insurance 40% 57% 22%
No extra bene?ts 28% 26% 46%
Number of respondents 109 58 46
Source: cebr survey of R3 members, 2007
The average insolvency practitioner works 43 hours a week.
This takes into account the practitioners that work part-time.
Practitioners in accountancy ?rms tend to work longer
hours. The average number of hours per week worked by
practitioners in accountancy ?rms and insolvency specialist
?rms is in Figure 19.
Practitioners that work for accountancy ?rms have a higher
gross basic salary than those in insolvency specialist ?rms;
47 per cent of practitioners in an accountancy ?rm earn
over £100,000 compared to 28 per cent of practitioners in
insolvency specialist ?rms (see Figure 18). Part of this can
be explained by the region in which the accountancy ?rms
are based – accountancy ?rms are more likely to be based
in London (see section 2.5).
We turn to the additional bene?ts insolvency practitioners
receive.
The additional bene?ts that practitioners receive also vary
according to the type of company in which they are based
(see Table 6). In particular, 50 per cent of practitioners
based in accountancy ?rms earn a bonus, compared
to 24 per cent that work in an insolvency specialist ?rm.
Of the practitioners based in accountancy ?rms 26 per
cent receive no additional bene?ts. Almost twice as
high a proportion (46 per cent) of practitioners based in
insolvency specialist ?rms receive no additional bene?ts.
0%
5%
10%
15%
20%
25%
30%
35%
40%
Less than
£45,000
£45,000 to
£69,999
£70,000 to
£99,999
£100,000 to
£149,999
More than
£150,000
Based in an accountancy firm An insolvency specialist firm
The value of the insolvency industry
27
Figure 20 Average working week for an
insolvency practitioner, share of time on activity,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007
Insolvency practitioners based in insolvency specialist
?rms spend a higher proportion of their time on formal
insolvency when compared to insolvency practitioners that
work in accountancy ?rms. Although accountancy ?rm
based practitioners spend a greater share of their time
(17 per cent) on preventing insolvency when compared to
insolvency specialist based practitioners (13 per cent) they
spend less time on debt advice (10 per cent versus 15 per
cent). These results are in Table 7.
Figure 19 Total hours worked by type of
insolvency practice, share of practitioners,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007
Insolvency practitioners spend much (42 per cent) of
their time on formal insolvency procedures, equivalent to
twenty hours a week. Seven hours a week are spent on
preventing insolvency. The remaining time is spent on other
insolvency related activities and non-insolvency related
work (see Figure 20).
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Less than 33 hours 33 to 40 41 to 48 more than 48
Based in an accountancy firm Based in an insolvency specialist firm
43%
17%
12%
14%
14%
Formal insolvency
Preventing insolvency
Debt advice
Other insolvency-related work
Non-insolvency related work
The value of the insolvency industry
28
Table 7 Share of time spent on insolvency and
non-insolvency procedures, by type of ?rm
practitioner is based, United Kingdom, 2007
36
All ?rms
36
Accountancy ?rm Insolvency specialist ?rm
Formal insolvency 42% 41% 47%
Preventing insolvency 16% 17% 13%
Debt advice 13% 10% 15%
Other insolvency-related work 14% 15% 13%
Non-insolvency related work 15% 17% 12%
Number of responses 109 58 46
Source: cebr survey of R3 members, 2007
The industry is well educated; 75 per cent of insolvency
practitioners have an ‘A’ level or equivalent and 57 per cent
have a university degree (see Table 8).
Table 8 Quali?cations by age, percentage of
insolvency practitioners, United Kingdom, 2007
Academic quali?cation Overall Under
44 years of age
Between 45 and 54
years old
Over 55 years of age
Professional Quali?cations 94% 98% 95% 86%
University degree or above 57% 67% 57% 36%
‘A’ Level or equivalent 75% 77% 82% 59%
GCSE or equivalent 76% 84% 84% 45%
Other 8% 9% 11% 0%
Number of respondents 109 43 44 22
Source: cebr survey of R3 members, 2007
The university degrees obtained by insolvency practitioners
are wide ranging. The most common degree obtained is in
accountancy or ?nance (seventeen per cent of degrees).
Degrees in economics, politics and business studies are
also among the most commonly obtained degrees, as
seen in Table 9.
Table 9 Degree obtained, as a share of
insolvency practitioners with a degree, United
Kingdom, 2007
Academic quali?cation Overall
Accounting and/ or ?nance 17%
Economics and/or politics 14%
Business Studies and/or commerce 13%
Biology, chemistry and/or psychology 11%
Law 10%
Mathematics 10%
Humanities 10%
Engineering 6%
Other, including languages and music 10%
Total 63
Source: cebr survey of R3 members, 2007
36 This includes law ?rms and ‘other’ ?rms. The number of responses was too low
to have stand alone results for practitioners from these types of ?rms.
The value of the insolvency industry
29
3. The importance and impact of the
insolvency industry
This chapter considers the importance the insolvency industry,
both directly and indirectly.
The key ?ndings are:
Direct employment in the industry is estimated to be 1.
12,700 jobs — more than twice the number of people
employed in the ?nancial leasing sector
Gross value added of the insolvency industry is estimated 2.
to be an annual £780 million, equivalent to ?ve per cent of
the accounting profession and 0.08 per cent of the total
economy
The insolvency sector has the greatest contribution to the 3.
North West’s economy, contributing an estimated 86 pence
per thousand pound of the region’s gross value added
The insolvency industry’s spending on goods and services 4.
in other industries generated a further £186 million,
spending by employees creates an additional £230 million.
The total multiplier effect is £417 million, equivalent to 0.04
per cent of the economy
We estimate the industry is responsible for saving 910,000 5.
jobs in 2006. The number of jobs saved through formal
insolvency proceedings was 312,000. We estimate a
total of 598,000 employees were saved through rescue
procedures. The businesses which were rescued
contributed approximately £132 billion in turnover
Our analysis of World Bank data suggests that the 6.
insolvency regime may be one of the most important
factors in stimulating a prosperous economy – there is a
strong relationship between the amount recovered when a
business is closed and economic growth, prosperity and
investment
The analysis showed that the time it takes to close a 7.
business also has a strong relationship with economic
growth and GDP per capita. The correlation with
investment was not as strong
The cost of closing a business was not as strongly related 8.
with the economy, although some relationship was
uncovered
The value of the insolvency industry
30
In this chapter, we consider the impact and importance of
the insolvency industry on the United Kingdom economy both
directly and indirectly.
First, we identify the direct contribution of the insolvency sector
to the United Kingdom using conventional measures such
as employment and gross value added. Second, we quantify
the indirect contribution through its employees’ spend and
acquiring inputs from other industries. Third, we look at how
the industry uses its expertise to save businesses and their
employees. Fourth, we investigate how the industry creates
an environment that is conducive to entrepreneurship and
appropriate risk taking.
3.1 The direct impact of the insolvency sector
In this section, we consider ‘direct’ measures of the insolvency
industry’s contribution to the United Kingdom economy,
through the gross value added of and employment in the
industry itself.
The conventional measures of the economic contribution made
by a sector to the economy are measures of employment and
gross value added (GVA)
37
. These are direct measures of the
scale of the industry itself; they do not evaluate any knock-on
bene?ts that the insolvency industry may have in other sectors.
We estimate the direct employment in the insolvency industry
to be approximately 12,700 jobs
38
in 2007, equivalent to 5.9
per cent of the accounting, bookkeeping and auditing services
sector (see Table 10). The insolvency industry employs more
than twice the number of people in the ?nancial leasing sector.
Table 10 Employment by industry, Great Britain,
2005 (insolvency sector UK 2007)
39
Industry Employment
Legal, accounting, book-keeping and auditing activities
39
936,600
Legal activities 270,100
Accounting, book-keeping and auditing activities 214,000
Secretarial and translation services 21,800
Photographic activities 27,500
The insolvency industry 12,700
Financial leasing 5,200
Source: Of?ce for National Statistics: annual business inquiry, 2005, and
cebr survey and analysis, 2007
37 A key measure of economic output is gross value added (GVA). GVA is de?ned
as gross output, or turnover, minus the value of intermediate goods and
services used in its production in an accounting period. The GVA generated
by a industry/industry is, to a ?rst degree of approximation, the sum of the
remuneration of employees and pro?t generated by the company or industry.
There is a close link between GVA and gross domestic product (GDP).
Speci?cally GVA at current basic prices plus taxes on products less subsidies
on products is equal to GDP at current market prices. The GVA of an industry
or region can be though of as its contribution to national GDP.
38 Based data from company accounts, The Insolvency Service the Of?ce of
National Statistics and corroborated by our survey of insolvency practitioners.
A full methodology is contained in the technical notes, section 6.2.
39 Includes tax consultancy; market research and public opinion polling; business
and management consultancy; holdings
London has the highest employment (with 3,100
employees); 2,200 people (sixteen per cent) are employed
in the South East and 2,000 are employed in the North
West. There are over 600 people employed in each region
of the Great Britain, excluding Wales and the North East,
as seen in Figure 21.
Figure 21 Number of people employed in the
insolvency industry
40
by region in Great Britain
41
(2007), thousand
Source: Of?ce for National Statistics: annual business inquiry, 2005; cebr
survey of R3 members, 2007
We now examine employment in the insolvency sector as
a share of the legal and accounting sector’s employment
42
.
This is because this is the sector the insolvency industry
would fall.
The insolvency sector employs 1.4 per cent of
Great Britain’s legal, accounting, book-keeping
and auditing activities sector. Despite a large
share of insolvency practitioners, and their
?rms, being based in London (see section 2.5),
it accounts for less than the average (1.1 per
cent) of Great Britain’s legal and accounting
employment. The North West’s insolvency
employment accounts for 2.3 per cent. This
share is greater than any other region. The North East’s
insolvency employment accounts for the lowest share
(excluding Wales
43
), at 0.7 per cent.
40 Of?ce of National Statistics, Annual Business Inquiry, 2007, latest data relates
to 2005 and Companies House, 2007, survey of insolvency professionals and
cebr analysis.
41 The number of responses from Northern Ireland was not high enough for a
reasonable estimate of employment to be made. Similarly, we have included
Wales in our results from the South West due to a low number of responses
42 Of?ce of National Statistics standard industrial classi?cation group 741: Legal,
accounting, book-keeping and auditing activities; tax consultancy; market
research and public opinion polling; business and management consultancy;
holdings
43 The number of responses from Wales was too low for an reliable estimate of
employment share. Figures for Wales have therefore been included with ?gures
from the South West
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
T
h
e
H
u
m
b
e
r
S
c
o
t
l
a
n
d
The value of the insolvency industry
31
Figure 23 Gross value added by region, billion,
Great Britain
47
, 2006
Source: Of?ce for National Statistics: regional accounts, 2007
Turning to the insolvency sector’s contribution to each
region’s economy, the insolvency sector has the greatest
contribution to the North West’s economy, as seen in
Figure 24. The insolvency sector contributes an estimated
86 pence per thousand pound of the region’s gross value
added. The insolvency sector has the smallest contribution
to the Welsh economy. However, the sector still contributes
nine pence for every thousand pound of the Welsh gross
value added.
Figure 24 Gross value added from insolvency
industry as a share of regions’ total GVA, pence
per thousand pound, United Kingdom, 2006
Source: Of?ce for National Statistics: annual business inquiry; cebr survey of
R3 members, 2007
47 The number of responses from Northern Ireland was too low for an reliable
estimates to be made. Similarly, the number of responses from Wales was low,
therefore ?gures for Wales have been included with ?gures from the South West
Figure 22 Employment in the insolvency
industry
44
(2006), as a share of employment in
legal, accounting, bookkeeping and auditing
activities, by region in Great Britain
45
(2005)
Source: Of?ce for National Statistics: annual business inquiry, 2005; cebr
survey of R3 members, 2007
The gross value added, or economic output, of the
insolvency industry is estimated to be £780 million per
annum
46
in 2006, which is equivalent to two per cent of
the legal and accounting sector and ?ve per cent from the
accounting profession. The insolvency industry’s direct
contribution to the United Kingdom economy is 0.08 per
cent of gross domestic product in 2006.
We compare the gross value added generated in each
region’s insolvency sector with gross value added
generated by each region’s economy as a whole.
The gross value added by London and the South East of
England is almost double that of the other regions in the
United Kingdom, as seen in Figure 25. Wales, Northern
Ireland and the North East are smaller than other regions of
the United Kingdom and have a lower contribution to the
economy.
44 Of?ce of National Statistics, Annual Business Inquiry, 2007, latest data relates
to 2005 and Companies House, 2007 and cebr analysis.
45 Comparable data was not available for Northern Ireland
46 Of?ce of National Statistics, Annual Business Inquiry, 2007, latest data relates
to 2005 and Companies House, 2007, cebr survey of insolvency practitioners
(2007) and cebr analysis. Annual Business Inquiry data relates to 2005 and as
a result GVA estimates are likely to be an underestimate, however, at the time
of analysis more up to date data are not available.
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
T
h
e
H
u
m
b
e
r
S
c
o
t
l
a
n
d
£0
£50
£100
£150
£200
£250
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
S
c
o
t
l
a
n
d
-
10
20
30
40
50
60
70
80
90
100
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
W
a
l
e
s
S
c
o
t
l
a
n
d
N
o
r
t
h
e
r
n
I
r
e
l
a
n
d
The value of the insolvency industry
32
3.2 The indirect contribution to
the economy
In this section, we analyse the indirect contribution of the
insolvency sector to the United Kingdom economy through
the ‘multiplier effect’
49
.
The ‘multiplier effect’ is the economic contribution that
results from the sector’s revenues being recycled through
spending on suppliers and their staff. We consider two such
indirect impacts:
upstream purchases – buying goods and services from •
other industries. As the insolvency industry buys inputs
from other sectors, it generates economic activity and
employment in these suppliers
employees’ spending – the part of the wages and salaries •
that employees of the insolvency industry spend on
consumer goods and services, also supports economic
activity and employment
The ‘multiplier effect’ is the sum of the upstream effect and
employees’ spend.
Total upstream purchases by the insolvency industry are
estimated to be an annual £186 million, equivalent to 0.02 per
cent of the economy’s gross domestic product in 2006. The
main sector the insolvency industry buys goods and services
from the education sector
50
; ten per cent of expenditure is
on education, equivalent to £19 million (see Table 11). Nine
per cent of the insolvencies expenditure is on legal activities,
equivalent to £17 million. Six per cent of spend is on the
accountancy industry, equivalent to £11 million.
Table 11 Upstream spend of insolvency industry,
percentage of intermediate consumption, United
Kingdom, 2005
Industry Million Share of spend
Education £19 10%
Legal activities £17 9%
Computer services £15 8%
Architectural activities and technical
consultancy
£13 7%
Other business services £12 6%
Accountancy services £11 6%
Postal and courier services £10 5%
Telecommunications £8 5%
Owning and dealing in real estate £8 4%
Ancillary transport services £6 3%
Source: Of?ce of National Statistics, 2005 and cebr survey and
analysis, 2007
49 The methodology we employed to estimate the multiplier effects is contained in
section 6.1
50 As de?ned by Of?ce of National Statistics standard industry classi?cation 80:
education. It includes schooling and adult education and training
We analyse the contribution of the insolvency industry
to each region’s business activities sector. The business
activities sector includes all legal, accounting, advertising
and architecture industries
48
.
The North West’s insolvency industry contributes
the largest amount to its business services sector, in
comparison to all other regions (see Figure 25). The
insolvency sectors in Scotland and the East Midlands also
contribute a large amount to their business services sector
when compared to the other regions.
Figure 25 Gross value added from insolvency
industry, as a share of business services sector
GVA, Great Britain, 2007
Source: Of?ce for National Statistics: annual business inquiry; cebr survey of
R3 members, 2007
48 We use the business services sector rather than the legal and accounting
sector because regional gross value added data is not available for the smaller
latter sector
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
E
a
s
t
M
i
d
l
a
n
d
s
W
e
s
t
M
i
d
l
a
n
d
s
E
a
s
t
E
n
g
l
a
n
d
N
o
r
t
h
W
e
s
t
N
o
r
t
h
E
a
s
t
Y
o
r
k
s
h
i
r
e
a
n
d
H
u
m
b
e
r
s
i
d
e
W
a
l
e
s
S
c
o
t
l
a
n
d
N
o
r
t
h
e
r
n
I
r
e
l
a
n
d
The value of the insolvency industry
33
saved through rescue proceedings in 2006.
54
Considering rescue procedures, as well as formal
proceedings, we estimate the industry is responsible
for saving 910,000 jobs in businesses with a combined
turnover of £132 billion per annum in 2006.
55
Some caution is needed when interpreting these estimates
of jobs saved. A person employed in a company following
formal insolvency proceedings is de?ned here as having their
job retained, or ‘saved’. This does not necessarily mean that
those who have had their job ‘saved’ would have become
unemployed if an alternative to insolvency proceedings had
taken place — nor does it mean that the job has been saved
through the direct intervention of the insolvency practitioner.
However, this measure does give an indication of the scale
of the insolvency industry’s importance. Meanwhile, there
are alternative measures of the insolvency industry’s impact
that we have not tried to estimate as part of this research
— such as the magnitude of assets recycled into pro?table
activities.
We now analyse the types of businesses that the insolvency
industry assisted in 2007. We ?rst consider the ?rms’
turnover. Second, we examine the region the business was
based. Third we consider which sectors the business’s main
activity was in.
According to our survey of insolvency practitioners
56
:
almost two-thirds (66 per cent) of businesses helped by
the insolvency industry in 2007 had turnover of less than
£1 million a year; 43 per cent of businesses had turnover
less than £500,000. Within formal proceedings: 53 per cent
had turnover of less than £500,000 a year; 22 per cent had
turnover over £1 million. This compares to eighteen per cent
of companies that were rescued having turnover of less than
£500,000 and 64 per cent having turnover greater than £1
million.
We now turn to the region of the business’s main activity.
Our survey of insolvency practitioners indicates a somewhat
different geographical distribution of failing businesses than
that suggested by of?cial data.
54 Calculated as 3,300 x 220 x 80%. Numbers as reported do not compute exactly
due to rounding
55 Our survey of R3 members captured data on the turnover of businesses involved
in formal and informal insolvency proceedings. These data were used to calculate
the £132 billion estimate.
56 See section 6.9 for survey questionnaire
The employees of the industry contribute a further £230
million to the economy, through their spending on goods
and services. The total multiplier effect is therefore £417
million, equivalent to 0.04 per cent of the economy.
3.3 Saving businesses from insolvency
and protecting employees
In this section we consider a further contribution of the
insolvency industry to the United Kingdom economy: the
jobs and businesses it saves.
In addition to its direct and indirect contribution to gross
value added and employment, the insolvency industry
helps protect and promote the general prosperity of the
United Kingdom through the outcome of the work it
does. In this section we examine how the sector directly
supports businesses through the services it provides for
insolvent companies. In particular, we look at the number
of businesses and jobs saved by the industry.
Of?cial ‘jobs saved’ numbers are not available, so we have
combined of?cial data on the number of insolvencies with
the results of our own survey of R3 members to produce
estimates of the number of jobs saved during processes
involving insolvency practitioners.
Of?cial ?gures show that insolvency practitioners dealt with
28,700 business failures
51
in 2006. This includes 17,800
corporations and 10,900 self employed businessmen; a
further 6,100 businesses went through rescue procedures.
Respondents to our survey report that the companies
put through formal proceedings had an average of 25
employees before the process began and eighteen
employees when the process was completed.
52
So,
on average, 72 per cent of the workforce was retained
(or ‘saved’) after formal insolvency. This equates to a
total number of jobs saved through formal insolvency
proceedings of 312,000
53
in 2006 in corporations alone.
According to of?cial data, a further 3,300 business were
saved through rescue procedures in 2006. Although fewer
?rms go through rescue rather than formal proceedings,
our survey results show they are typically bigger with an
average of 220 employees in the company before the
rescue procedures begin. After the procedures have been
completed, 80 per cent of employees remain employed.
Therefore, we estimate a total of 598,000 employees were
51 Insolvency service, Statistical release: insolvencies in the third quarter 2007 and
Of?ce of National Statistics, 2007
52 Estimated from our survey of insolvency practitioners, 2007
53 Calculated as 17,800 x 25 x 72%. Numbers as reported do not compute
exactly due to rounding. Methodology is in section 6.4
The value of the insolvency industry
34
Our survey of R3 members also provides insight into the
activities of businesses dealt with by the insolvency industry.
Respondents reported that manufacturing ?rms had a
relatively high share of their assistance; they accounted for
one-in-?ve cases (see Figure 28).
The survey also suggests that the sector a business is in
does not in?uence whether it will be put through formal
procedures or a rescue (see Table 12).
Figure 28 Main activity of client,
United Kingdom, 2007
Source: cebr survey of R3 members, 2007
Insolvency practitioners reported that they worked with
more businesses in the South East (22 per cent) than any
other region, followed by the Midlands (sixteen per cent),
London (fourteen per cent) and the North West (thirteen
per cent) (see Figure 26). Of?cial statistics, on the other
hand, suggest that London businesses account for the
largest share of company insolvencies (see Figure 27). This
may re?ect, in part, the emphasis in of?cial statistics on the
location of ?rms’ registered and headquarters’ addresses
– often London – rather than the locations from which they
trade.
Figure 26 Region of client’s main business
activity, Great Britain, 2006
Source: cebr survey of R3 members, 2007
Figure 27 Company insolvencies by region
57
,
England and Wales, 2006
Source: The Insolvency Service, speci?cally requested, 2007
57 Regions based on insolvency service de?nitions, speci?cally requested
information
0%
5%
10%
15%
20%
25%
30%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
M
i
d
l
a
n
d
s
N
o
r
t
h
E
a
s
t
,
Y
o
r
k
s
h
i
r
e
&
t
h
e
H
u
m
b
e
r
N
o
r
t
h
W
e
s
t
E
a
s
t
o
f
E
n
g
l
a
n
d
S
c
o
t
l
a
n
d
0%
5%
10%
15%
20%
25%
30%
35%
40%
L
o
n
d
o
n
S
o
u
t
h
E
a
s
t
S
o
u
t
h
W
e
s
t
a
n
d
W
a
l
e
s
M
i
d
l
a
n
d
s
A
n
g
l
i
a
r
e
g
i
o
n
N
o
r
t
h
E
a
s
t
N
o
r
t
h
W
e
s
t
0%
5%
10%
15%
20%
25%
M
a
n
u
f
a
c
t
u
r
i
n
g
F
i
n
a
n
c
e
a
n
d
b
u
s
i
n
e
s
s
s
e
r
v
i
c
e
s
C
o
n
s
t
r
u
c
t
i
o
n
W
h
o
l
e
s
a
l
e
R
e
t
a
i
l
T
r
a
v
e
l
a
n
d
t
r
a
n
s
p
o
r
t
T
e
c
h
n
o
l
o
g
y
m
e
d
i
a
a
n
d
t
e
l
e
c
o
m
m
s
L
e
i
s
u
r
e
O
t
h
e
r
The value of the insolvency industry
35
In this section we examine economic performance using
three measures. The ?rst is economic prosperity, measured
by gross domestic product per capita. The second is the
propensity to invest, measured by investment as a share
of gross domestic product. The third is the rate of growth,
measured as average growth in gross domestic product
since the year 2000. These are now examined in turn.
We ?rst analyse the relationship between the business
indicators and economic prosperity, measured by gross
domestic product per capita.
The recovery rate when a business is closed (i.e. the cents
on the dollar recouped by creditors through the bankruptcy
or insolvency proceedings) has the strongest relationship
with economic prosperity of all the ease of business
indicators collected by the Bank, as seen in Table 13. The
relationship can be seen in Figure 29. This ?nding suggests
that the more con?dent creditors can be in a country
regarding repayment, the more likely it is that the economy
will be prosperous.
Table 12 Clients’ main business activity, by
nature of work, 2007
Sector Overall Formal insolvency Rescue
Manufacturing 20% 20% 24%
Finance and business services 8% 7% 8%
Construction 14% 16% 12%
Wholesale 5% 6% 5%
Retail 13% 15% 11%
Travel and transport 5% 4% 10%
Technology media and telecoms 9% 10% 7%
Leisure 7% 8% 5%
Other 19% 15% 19%
Total responses 604 418 106
Source: cebr survey of R3 members, 2007
3.4 Encouraging entrepreneurship
and liquidity
We now turn to the broader signi?cance of the insolvency
industry — its role in creating an environment that is
conducive to entrepreneurship and appropriate risk taking.
It is widely understood that the prosperity and growth of
an economy is in large part dependent on its ability to
encourage entrepreneurship, innovation and appropriate
risk taking, with the support of liquid and ef?cient capital
markets. The insolvency industry — and the regime within
which it operates — is central to this by supporting and
safeguarding both entrepreneurs and creditors.
Analysis of World Bank data that we have conducted for
this report suggests that the insolvency regime may be one
of the most important factors in stimulating a prosperous
economy.
The World Bank provide data on the ‘ease of doing
business’ in 175 countries; these cover 39 objective
measures of different characteristics of each economy. We
have examined
58
how strongly correlated each of these
characteristics are with the overall economic performance
of the economies.
Out of the 39 measures, three are related to the insolvency
industry:
The amount recovered when an exemplar business is •
closed
59
The time taken to close an exemplar business •
The cost of closing an exemplar business •
58 For methodology see section 6.5
59 To ensure comparability across countries, the World Bank calculate the
outcomes in each jurisdiction for the same exemplar business (see section 6.5).
As such, the World Bank data do not necessarily re?ect the average outcome
in each jurisdiction as the exemplar case may be more or less representative of
that country’s average case.
The value of the insolvency industry
36
Figure 29 Correlation between economic
prosperity and amount recovered when a
business is closed*, 68 countries
60
, 2007
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, Organisation for
Economic Co-operation and Development (OECD) and cebr analysis, 2007
* Note: Recovery rates quoted are based on the outcome a speci?c
scenario developed and consistently applied by the World Bank. It is not
a measure of average recovery rates across each jurisdiction. Indeed, we
recognise that average recovery rates in the United Kingdom are much
lower than this speci?c example.
The analysis showed that the time it
takes to close a business also had a
strong, negative relationship with gross
domestic product per capita (twelfth
strongest, see Table 13). This shows
that strong and prosperous economies
tend to be found in those countries in
which it is quick to close a business.
Figure 30 shows the relationship
between the time to close a business
and gross domestic product per capita.
60 We included countries where we have data on both the amount recovered
when a business is closed and GDP per capita
$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
0% 20% 40% 60% 80% 100%
Amount recovered when a business is closed
G
D
P
p
e
r
c
a
p
i
t
a
,
t
h
o
u
s
a
n
d
,
2
0
0
4
United
Kingdom
Figure 30 Correlation between economic
prosperity and time to close a business, 68
countries
61
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr analysis,
2007
Table 13 World Bank variables and correlation
with GDP per capita, across 68 countries, 2006
62
Rank
62
World Bank indicator Correlation
(1) The ease of doing business index (ranking) -0.82
1 (2) Amount recovered when a business is closed (%) +0.81
2 (3) Time to import across borders (days) -0.71
3 (4) Documents needed to import -0.70
4 (5) Time to export (days) -0.68
5 (6) Getting credit, private bureau coverage (% of adults) +0.64
6 (7) Enforcing contracts (number of procedures) -0.63
7 (8) Depth of credit information (index) +0.60
8 (9) Starting a business (number of procedures) -0.60
9 (10) Documents needed to export (number) -0.60
12 (13) Time taken to close a business (years) -0.52
19 (20) Cost of closing a business (% of estate) +0.46
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr analysis,
2007
61 We included countries where we have data on both the amount recovered when
a business is closed and GDP per capita
62 The ease of business indicator is a composite index, whereas other indicators are
independent business indicators. Therefore, technically, it should not be directly
compared with the other indicators.
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
0 2 4 6 8 10
Time to close a business, years, 2006
G
D
P
p
e
r
c
a
p
i
t
a
,
t
h
o
u
s
a
n
d
,
2
0
0
4
United
Kingdom
The value of the insolvency industry
37
We now turn to analysing the relationship between the
propensity to invest and the insolvency industry.
In terms of the link between different ease of doing business
variables and the proportion of gross domestic product
accounted for by investment, we again ?nd correlation
between various features of the insolvency regime and this
measure of economic success.
The recovery rate has the strongest relationship with
investment out of all 39 factors examined, as seen in Table
14. The time to close a business and cost of closing a
business were weakly related to investment as a share of
gross domestic product, although some relationship was
uncovered. This suggests creditors’ con?dence is strongly
linked with investment in a country.
Table 14 World Bank variables and correlation
with investment as a share of GDP, across 68
countries, 2006
64
Rank
64
World bank index Correlation
1 (1) Amount recovered when a business is closed (%) +0.57
- (2) The ease of doing business (ranking) -0.51
2 (3) Time to import across borders (days) -0.48
3 (4) Time to export (days) -0.47
4 (5) Cost to import (cost per container) -0.44
5 (6) Cost of registering property (% of estate) -0.43
6 (7) Getting credit, ease of information index +0.43
7 (8) Documents needed to import -0.42
8 (9) Documents needed to export -0.39
9 (10) Procedures to register a property -0.38
23 (24) Time to close a business (years) -0.23
26 (27) Cost of closing a business (% of estate) -0.18
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of Production,
Income and Prices, Penn world tables, OECD and cebr analysis, 2007
64 The ease of business indicator is a composite index, whereas other
indicators are independent business indicators. Therefore, technically,
it should not be directly compared with the other indicators.
The cost of closing a business also has a strong
relationship with the strength of a country’s economy,
although it is not as strong as the recovery rate or time
to close a business, as seen in Figure 31. This suggests
that, as the cost of closing a business (as a percentage of
the cost of the estate) falls, a country is more likely to be
prosperous.
Figure 31 Correlation between economic
prosperity and cost of closing a business, 68
countries
63
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr
analysis, 2007
63 We included countries where we have data on both the amount recovered
when a business is closed and GDP per capita
United
Kingdom
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
0 20 40 60 80
Cost of closing a business, percentage of estate, 2006
G
D
P
p
e
r
c
a
p
i
t
a
,
t
h
o
u
s
a
n
d
,
2
0
0
4
The value of the insolvency industry
38
It is also important to look at the growth
of the economy, as well as the overall
prosperity. Growth is also strongly related
to the insolvency regime. In particular,
there is a strong relationship between the
gross domestic product growth rate and
the amount recovered when a business
is closed, as seen in Figure 32. This
relationship was stronger than all other ease
of business variables, except the total tax
on a business, as seen in Table 15.
The time to close a business also has
a strong relationship with the growth of
an economy. Taking less time to close a
business is closely related to having faster
economic growth. The cost of closing
a business was not as strongly related
to economic growth. These results are
included in section 6.1.
Figure 32 Correlation between economic
growth and amount recovered when a business
is closed GDP growth, OECD countries with
GDP per capita greater than $20,000 per annum,
current prices
Source: World Bank and International Finance Corporation, Doing Business
2007 ‘How to reform’, 2007, Center for International Comparisons of
Production, Income and Prices, Penn world tables, OECD and cebr
analysis, 2007
0%
1%
2%
3%
4%
5%
6%
7%
0 20 40 60 80 100
Amount recovered when a business is closed, percentage
G
D
P
g
r
o
w
t
h
r
a
t
e
,
a
v
e
r
a
g
e
a
n
n
u
a
l
p
e
r
c
e
n
t
a
g
e
c
h
a
n
g
e
(
2
0
0
0
-
2
0
0
6
)United
Kingdom
Table 15 World Bank variables and correlation
average annual GDP growth between 2000 and
2006, 20 OECD countries
65
, 2006
Rank World bank index Correlation
1 Total tax (% of pro?t) -0.47
2 Recovery rate when a business is closed +0.47
3 Number of tax payments a year -0.42
4 Strength of investor protection (index) +0.42
5 Ease of shareholder suits (index) +0.41
6 Number of procedures to start a business +0.40
7 Cost of dealing with licenses (% of income per capita) -0.40
8 Time to close a business (years) -0.39
9 Number of procedures to enforce a contract -0.39
10 Minimum capital to start a business (of income per capita) -0.36
(11) The ease of doing business (ranking) -0.34
31 (32) Cost of closing a business (% of estate) -0.07
Sadly, many excellent researchers have stumbled when
attempting to codify these relationships, and doubt remains
about the precise nature and strength of them. Our analysis
does not prove causality and we do not suggest that the
insolvency regime’s contribution to an economy can be
viewed in isolation. However, our results do highlight the
importance of an economy’s business failure regime to its
overall success.
65 We included all OECD countries where we had consistent data on the economic
growth and the World Bank’s ease of doing business indicators
The value of the insolvency industry
39
4. Strengths and weaknesses of the United
Kingdom’s insolvency industry
This chapter considers the strengths and weaknesses of the
insolvency sector, including a comparative analysis against
other international jurisdictions.
The key ?ndings are:
1. The insolvency regime, and in particular, the balance
between debtor’s and creditor’s interests can have
signi?cant effects on the overall economy. Evidence
suggests the relationship is complex and non-linear
2. The United Kingdom is ranked tenth out of 175 countries
by the World Bank for the amount recovered for creditors
when a business is closed
3. World Bank data suggest that, of 127 countries analysed,
the United Kingdom is ranked ninth quickest — with the
time taken to close a typical business being one year. Data
from our survey of insolvency practitioners support this
?nding
4. The United Kingdom did not fare as well when compared
to the rest of the world in terms of the cost of closing a
business. The cost of closing a business includes court
costs, fees of insolvency practitioners, independent
assessors, lawyers and accountants. The United Kingdom
was ranked 22nd with the average cost estimated to be six
per cent of the value of the estate
5. Issues relating to the regulation of the industry were
recurrent both in the responses to our survey of insolvency
professionals and in our discussions with industry leaders
and experts, although there was no clear consensus over
whether the regulatory regime is a strength or a weakness
of the United Kingdom industry
6. Having eight parallel regulators (and The Insolvency Service
also licensing) was seen as the industry’s main weakness in
our survey of insolvency employees. It was considered that
it reduces the ability for regulators to adapt to a changing
environment. It also affects the perceived consistency and
transparency of the industry and can lead to duplication
of effort in order to ensure consistent and transparent
regulation. There is also a risk that there will be unnecessary
regulation
The value of the insolvency industry
40
regimes dif?cult. This compounds a lack of comparable data
on the impacts of insolvency regimes. As such, much of the
academic literature focuses on the United States, where
a more robust comparison between states is possible.
We now turn to ?ndings that have come from analysis of
different insolvency regimes in the United States and its
impact on entrepreneurship and liquidity.
In the United States, some states have different levels of
assets that are exempt from the bankruptcy procedure.
In some states the level of exemption is low – almost all
assets can be liquidised for redistribution to creditors. In
other states, the level is much higher; for example, in Texas
housing property is fully exempt regardless of value. This
has given many academics the chance to analyse the effect
of bankruptcy regimes – how ‘debtor friendly they are’ –
and the implications for entrepreneurship and other factors
such as liquidity. Figure 33 synthesises the ?ndings of much
of the research
66
conducted on the United States. The
?gure shows how increasing debtor-friendliness, measured
using the homestead exemption rate, has a complex non-
linear impact on levels of self-employment – an indicator of
entrepreneurial activity.
According to the academic studies, only those states
where between half and three-quarters of ‘homestead
assets’ are exempted from bankruptcy redistribution have
entrepreneurship rates above regimes where no such
assets are exempted. At other levels of debtor friendliness,
the ‘credit access effect’ dominates and the level of
entrepreneurship is lower. These studies suggest that only
minor changes to an insolvency regime can have signi?cant
knock-on impacts for the economy.
66 Georgellis, Y., Wall, H.J., ‘Entrepreneurship and the Policy Environment’, Federal
Reserve Bank of St. Louis Review 88(2), 2006, pp 95-111. Fan, W., White, M.J.,
‘Personal Bankruptcy and the Level of Entrepreneurial Activity’, Journal of Law
and Economics 46, 2003, pp 543 – 568. Armour, J., ‘Personal Insolvency Law
and the Demand for Venture Capital’, European Business Organization Law
Review 5, 2004, pp 87 – 118. Berkowitz, J., White, M.J., ‘Bankruptcy and small
?rms’ access to credit’, The RAND Journal of Economics 35:1, 2004, pp. 69-84.
White, M.J., ‘Personal Bankruptcy: Insurance, Work Effort, Opportunism and the
Ef?ciency of the ‘Fresh Start’, 2005.
In this chapter, we consider the strengths and weaknesses
of the insolvency industry.
Wherever possible examining how the United Kingdom’s
insolvency industry performs internationally, we consider
the industry’s:
balancing of creditors’ and debtors’ interests •
ef?ciency •
regulation •
4.1 The balance between creditor’s and
debtor’s interests
In this section, we analyse the affect of an insolvency
regime on creditors’ and debtors’ behaviour. We explore
the trade off between the two parties’ interests that needs
to be taken into account when assessing an insolvency
regime.
The design of an insolvency regime – and striking the
balance between creditors and debtors – is not a trivial
matter. However, evidence suggests in the United Kingdom
the relationship is well balanced.
When looking at the creditor-debtor balance there are two
opposing in?uences that need to be considered:
As systems become more debtor friendly, people are •
encouraged to take more ?nancial risk. This increases
demand for credit and this credit promotes economic
activity. Debtors are, in effect, insured against not
being able to make repayments on their debt. This is
sometimes known as the insurance effect.
More debtor friendly regimes discourage creditors to •
lend as they are have a greater exposure to the risk;
creditors increase the cost of credit and/or restrict
availability of credit. This may reduce liquidity in the
economy. This is sometimes known as the credit access
effect.
There are also social implications of bankruptcy. Having a
more debtor friendly regime minimises personal issues that
can be associated with bankruptcy, however this is also
likely to increase the likelihood of culpable behaviour or
inappropriate risk taking.
Our review of the academic literature has found little
research into this trade off in the United Kingdom or other
jurisdictions, except the United States.
Different jurisdictions are debtor or creditor friendly in
different ways; they deploy different instruments in diverse
legislative environments making comparison across
The value of the insolvency industry
41
We look at these in turn.
The World Bank’s regular comparison of jurisdictions
68
provides internationally comparable data on the typical
proportion of outstanding debt returned to creditors after a
business is closed.
These World Bank data suggest that the United Kingdom
insolvency industry would be successful in recovering 85
per cent of the World Bank’s exemplar business’s assets
when closed. This compares to an average of 25 per cent
out of 127 countries
69
, and a maximum of 93 per cent
in Japan. The United Kingdom is ranked tenth out of the
127 countries. As discussed in section 3.4, our research
has shown that there is a strong correlation between the
return to creditors after closure and an economy’s level of
investment and overall prosperity.
68 World Bank and International Finance Corporation, Doing Business 2007 ‘How
to reform’, 2007. See section 6.5 for further details
69 Some of the 175 countries in their dataset have ‘no practice’ and are therefore
not included in the ranking, World Bank Ease of World Bank and International
Finance Corporation, Doing Business 2007 ‘How to reform’, 2007
Source: Georgellis, Y., Wall, H.J.,
‘Entrepreneurship and the Policy
Environment’, Federal Reserve
Bank of St. Louis Review 88(2),
pp 95-111, 2006
Figure 33 Relationship between insolvency
regime (exemption level) and entrepreneurship,
United States
The research into varying homestead exemption rates in
states of the United States has only limited direct relevance
to the United Kingdom. Meanwhile, although there is
a signi?cant body of research into the United Kingdom
insolvency industry, little has looked at either the links
between the sector and national economic performance, or
the comparative strengths and weaknesses of the United
Kingdom regime versus those of other jurisdictions.
67
Instead, we have had to collate data ourselves from which
to draw such conclusions.
We attempt to measure how the United Kingdom’s
insolvency regime compares internationally for its balance
between debtor and creditor interests by considering two
factors:
The amount a creditor receives versus the amount a •
debtor retains; which provides an estimate of creditor
protection
The restrictions a bankrupt is subject to •
67 Armour, J, Hsu, A and Walters, A ‘The Impact of the Enterprise Act 2002 on
Realisations and Costs in Corporate Rescue Proceedings’, 2007; Look Chan
Ho ‘Insolvency meets ?nancial assistance: MT Realisations v Digital Equipment
(2002)’ 17 J.I.B.F.L. 443-447; Armour, J., Cumming, D., ‘Bankruptcy Law and
Entrepreneurship’, University of Cambridge Centre for Business Research
Working Paper No. 300, 2005. Gladstone, B., Lane Lee, J., ‘The Operation of
the Insolvency System in the U.K.: Some Implications for Entrepreneurialism’,
Small Business Economics 7, 1995, pp55-66.
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0
%
1
0
%
2
0
%
3
0
%
4
0
%
5
0
%
6
0
%
7
0
%
8
0
%
Homestead exemption rate
D
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
n
o
e
x
e
m
p
t
i
o
n
e
n
t
r
e
p
r
e
n
e
u
r
s
h
i
p
r
a
t
e
Insurance effect
dominates
Credit access
effect dominates
Increasing ‘debtor friendliness’
I
n
c
r
e
a
s
i
n
g
e
n
t
r
e
p
r
e
n
e
u
r
s
h
i
p
0
%
1
0
%
2
0
%
3
0
%
4
0
%
5
0
%
56
0
%
7
0
%
8
0
%
Homestead exemption rate p
Credit access
effect dominates
The value of the insolvency industry
42
Table 17 Selection of variables for ‘debtor
friendliness’, ?fteen countries, 2007
707172
Country Disabilities
70
Composition
71
Crimes
72
United Kingdom 2 1.00 0
Austria 0 1.25 0
Belgium 3 1.00 0
Canada 2 1.16 0
Denmark 3 1.35 0
Finland 3 0.80 0
France 2 0.00 0
Germany 1 1.00 1
Greece 3.5 1.46 1
Ireland 2 1.00 0
Italy 3 1.16 1
Netherlands 0 1.00 0
Spain 3 0.50 0
Sweden 2 2.00 0
United States 1 1.00 0
Average 2.0 1.00 0.2
Source: Armour and Cumming, forthcoming
Turning to restrictions on bankrupts, there is limited
73
comparable information across jurisdictions. In a
forthcoming paper, two academics attempt to develop
a comparative empirical assessment. In the paper, John
Armour and Douglas Cummings measure three factors
relating to bankruptcy law, which can be seen as variables
relating to how ‘debtor friendly’ a regime is:
Disabilities: These are restrictions on the debtor’s civil and •
economic rights after bankruptcy
Composition: This relates to the possibility of reaching an •
agreement with creditors as a means of terminating an
existing bankruptcy proceeding
Crimes: This is the criminal liability placed on bankruptcy •
proceedings
In their paper, they compare these factors across a selection
of countries. According to their research, the United
Kingdom rates near the centre for the disabilities imposed
on the debtor and the composition between debtor and
creditor. Table 17 contains the results.
70 Takes value 0 if there are no disabilities other than loss of power to deal with
assets in bankrupt estate; Takes the value 1 if there are civic disabilities (i.e.
loss of right to vote, hold elected of?ce, membership of professional groups);
Takes value 2 for economic disabilities (i.e. restrictions on obtaining credit, being
involved in the management of a company); Takes value 3 for interference with
mail and/or travel (i.e. prohibition on travel without consent, mail opened by
trustee); Takes value 4 if debtor may be incarcerated for non-payment of debts.
71 The variable takes a value between 0 and 2, and is the sum of [(1-v) + (1-c)],
where v is proportion of face value of existing creditors’ claims and c is proportion
of number of creditors, who must vote in favour to effect a compromise.
72 Takes value 0 if no criminal liability attached to bankrupts unless fraud is shown;
takes value 1 if criminal liability can be attached to bankrupts who have been
negligent
73 European Private Equity and Venture Capital Association (EVCA), ‘Bankruptcy
and Insolvency’, 2002. Armour, J., Cumming, D. (2005) ‘Bankruptcy Law and
Entrepreneurship’, University of Cambridge Centre for Business Research
Working Paper No. 300.
Table 16 Amount recovered when exemplar
business is closed, top twenty out of 127
countries when ranked for recovery rate and
other key economies, 2007*
Rank Country Recovery rate (%)
1 Japan 92.7
2 Singapore 91.3
3 Norway 91.1
4 Taiwan 89.5
5 Canada 89.3
6 Finland 89.1
7 Ireland 87.9
8 Belgium 86.4
9 Netherlands 86.3
10 United Kingdom 85.2
11 Korea 81.8
12 Australia 79.7
=12 Iceland 79.7
14 Hong Kong, China 78.9
15 Spain 77.6
16 United States 77.0
17 Sweden 75.7
18 Portugal 75.0
19 Austria 73.7
20 Denmark 70.5
28 Germany 53.1
32 France 48.0
49 Italy 29.7
Source: World Bank and cebr analysis, 2007
* Note: Recovery rates quoted are based on the outcome a speci?c
scenario developed and consistently applied by the World Bank. It is not
a measure of average recovery rates across each jurisdiction. Indeed, we
recognise that average recovery rates in the United Kingdom are much
lower than this speci?c example.
Unfortunately, the World Bank data relates to only business
insolvencies. We are also interested in creditors’ returns
when individuals become insolvent. However, little relevant
internationally comparative information or data was
available for this study.
The value of the insolvency industry
43
Table 18 Time
74
taken to close a business, years,
top twenty out of 127 countries when ranked by
length of time to close a business and other key
economies, 2007
Rank Country Time (years)
1 Ireland 0.4
2 Japan 0.6
3 Canada 0.8
=4 Singapore 0.8
=5 Taiwan, China 0.8
6 Belgium 0.9
=6 Finland 0.9
=6 Norway 0.9
9 United Kingdom 1.0
=9 Australia 1.0
=9 Belize 1.0
=9 Iceland 1.0
=9 Palau 1.0
=9 Solomon Islands 1.0
=9 Spain 1.0
16 Austria 1.1
=16 Hong Kong, China 1.1
=16 Jamaica 1.1
19 Germany 1.2
=19 Italy 1.2
26 United States 1.5
36 France 1.9
Source: World Bank, based on a survey of practicing insolvency lawyers and
veri?ed through a study of laws and regulations as well as public information
on bankruptcy systems and cebr analysis
74 Time captures the estimated duration required to complete a bankruptcy.
Information is collected on the sequence of bankruptcy proceedings and on
whether any procedures can be carried out simultaneously. Delays due to legal
derailment tactics that parties to the bankruptcy may use – in particular, the
extension of response period or appeals – are also considered.
Overall, the United Kingdom’s regime appears well
balanced when compared with other jurisdictions. It has,
by international standards, quite average restrictions on
bankrupts while maintaining a relatively high level of return
for creditors.
These conclusions are corroborated by the results of
our survey of United Kingdom insolvency professionals.
The survey revealed that 57 per cent of insolvency
professionals thought the balance between creditor and
debtor is a strength of the United Kingdom’s insolvency
regime. Only seven per cent felt it was a weakness, giving
a strong positive balance of +50 per cent.
4.2 The ef?ciency of the United Kingdom’s
insolvency industry
In this section, we examine the ef?ciency of the United
Kingdom’s insolvency industry. There are three factors that
are linked to the ef?ciency of the industry:
The time it takes to close a business •
The cost of closing a business •
Recovery rate i.e. the share of outstanding debts •
recovered by creditors after a business closes
We consider the ?rst two factors, in turn. The recovery
rate is covered in our analysis of the relationship between
creditor and debtor (see section 4.1).
When compared against other jurisdictions, the time to
close a business in the United Kingdom is relatively short
and the amount recovered by creditors after a business
closure is high. However, the overall cost of closing a
business is high when compared to other economies of a
similar size.
Considering the time it takes to close a business, the
World Bank data suggest that, of the 127 countries
analysed, the United Kingdom is ranked ninth quickest,
alongside six other countries. The estimated time taken
to close the World Bank’s exemplar business is one year.
This compares with to 0.4 years in Ireland and an overall
average across all countries surveyed of just over three
years.
The value of the insolvency industry
44
But there may be compelling reasons for the apparently
higher costs of the United Kingdom’s regime. For example,
insolvency practitioners operate in a regulated environment,
so there are costs of compliance to borne. It may also
be the case that the relatively higher costs in the United
Kingdom re?ect the remuneration needed for an industry that
performs well in other more important respects — such as
speed of closure. Moreover, the United Kingdom’s relatively
poor performance here may not impinge signi?cantly on
the insolvency sector’s contribution to the country’s overall
economy. Our analysis of internationally comparable data
suggests there is only a limited link between the average
costs of closure in a jurisdiction and that jurisdiction’s
prosperity (see section 3.4).
Our survey of insolvency professionals and expert
interviews support this ?nding. The survey revealed that
42 per cent of insolvency professionals perceived the
speed of the United Kingdom’s insolvency system to be
a bene?t: seventeen per cent perceived it as a weakness.
Similarly, 40 per cent of industry professionals reported that
the ef?ciency of the United Kingdom systems is a bene?t.
Eight per cent selected ef?ciency as a weakness, giving a
positive balance of +33 per cent.
Three of the seven experts interviewed mentioned dealing
with assets quickly and ef?ciently was a main bene?t, and
something the United Kingdom was particularly good
relative to its international peers. Less involvement with
the court was seen to quicken the processes, whilst being
more cost ef?cient. Having insolvency specialists and
trained judiciary were given as reasons for the increased
ef?ciency.
Importantly, in section 3.4 we ?nd the time to close a
business is closely linked with economic prosperity.
The second aspect of ef?ciency of the insolvency industry
that we consider is the cost of closing a business.
The United Kingdom does not fare as well when compared
to the rest of the world in terms of the cost of closing a
business. Here, we consider costs in a broad sense —
including all of?cial costs, such as court costs, independent
assessors, lawyers and accountants, and not just the fees
of insolvency practitioners. The United Kingdom is ranked
22nd by the World Bank with the typical cost estimated
to be six per cent of the value of their exemplar business’
estate. In six countries the cost is just one per cent of the
estate and in ?fteen countries the cost is four per cent.
75
Costs
76
(both for corporate and individual procedures)
were also highlighted as a weakness in expert interviews
and in our survey of insolvency practitioners. Only eight
per cent of respondents to our survey selected the cost of
procedures as a strength; 23 per cent considered costs
to be a weakness, giving a balance of -16 per cent. This
result is placed in context in Table 19.
75 To ensure consistent comparable data, these World Bank data relate to the
estimated cost of a closing the same ‘exemplar’ business across different
countries. However, this means that the World Bank estimate may not re?ect
the average costs across all closures in any one country. See section 6.5
76 The costs perceived by respondents are likely to include court costs,
professionals’ fees and the time burden.
The value of the insolvency industry
45
To address these concerns insolvency practitioners have
been involved in helping The Insolvency Service ?nalise
proposed changes to the individual voluntary arrangement
regime. Part of the proposals is to introduce Simple
Individual Voluntary Arrangements (SIVA) as an alternative
to Individual Voluntary Arrangements. According to the
government consultation paper
77
on the proposals:
‘A SIVA will be better suited to the needs
of indebted individuals whose affairs are
straightforward. This proposal would
also bene?t creditors as the simpli?cation
will reduce administrative costs and is
expected to generate better dividends.’
The amount recovered when a business is closed is also
a factor that gives a strong indication of how ef?cient the
insolvency industry is. As analysis is section 4.1 explains,
the United Kingdom is ranked tenth out of the 127 countries
analysed in the amount recovered when a business is
closed.
77 The Insolvency Service, ‘A consultation document on proposed changes to the
Individual Voluntary Arrangement (IVA) regime contained in the Insolvency Act
1986 and associated matters’, 2007
Table 19 Strengths and weaknesses of the
insolvency sector, share of respondents, United
Kingdom, 2007
Factor Number of
respondents
selecting ‘strength’
or ‘weakness’
Respondents
selecting factor as
a ‘strength’
Respondents
selecting factor as
a ‘weakness’
Balance
The balance between debtor and creditor 106 57% 7% +50%
The speed of the processes 97 42% 17% +25%
The ef?ciency of the industry 80 40% 8% +33%
The cost of the procedures 52 8% 23% -16%
Punishment against ‘culpable’ insolvents 83 21% 29% -8%
The structure of insolvency practitioner’s fees 53 6% 26% -20%
Source: cebr survey of R3 members, 2007
Insolvency practitioners’ fees are part of the cost burden.
Since 2006, some creditors have expressed concern over
fees relating to individual voluntary arrangements. The
majority of work for an individual voluntary arrangement
occurs at the beginning of the process, and the fees
re?ected this.
Creditors were concerned that the structure of payment
did not give insolvency practitioners an incentive to ensure
payment to the creditor throughout the full term of the
individual voluntary arrangement. It is impossible for an
insolvency practitioner to guarantee the future payment by
the debtor, as future circumstances cannot be known. In
addition, as insolvency practitioners attempt to maximise
payment for the creditor, the debtor is likely to have little
available income.
Insolvency professionals understand the rationale behind
the concern about the fee structure. Responses from our
survey revealed that 26 per cent of the insolvency industry
are concerned the structure of insolvency practitioners fees
were a weakness; only six per cent believe the structure is
a strength.
The value of the insolvency industry
46
Accountancy based employees are more likely to ?nd the
way the industry is regulated a weakness rather than a
strength. In contrast, there is a higher share of employees
from other types of ?rms that perceive the way the
industry is regulated as a strength. Nevertheless, although
the subject got a high share of responses, the balance
remains close to zero for workers in both accountancy and
insolvency specialist ?rms. Results can be seen in Table 21.
4.3 The regulation of the industry
In this section, we turn to the regulation and supervision of
the insolvency industry.
Issues relating to the regulation of the industry were
recurrent both in the responses to our survey of insolvency
professionals and in our discussions with industry leaders
and experts. However, there was no clear consensus over
whether the regulatory regime is a strength or a weakness
of the United Kingdom industry. This can be seen in a
selection of the survey results in Table 20.
Table 20 Strengths and weaknesses of
the insolvency sector, percentage of
respondents, 2007
Factor Number of
respondents
Percentage
‘strength’
Percentage
‘weakness’
Balance
The way the industry is regulated 105 33% 31% +2%
The ?exibility of the industry 92 51% 5% +46%
The consistency of the industry 83 19% 31% -13%
The transparency of the industry 94 30% 27% +2%
The ability to adapt to a changing environment 104 57% 5% +52%
The speed at which the regulators can adapt
to a changing environment
81 8% 41% -33%
Having 8 regulators (plus The Insolvency
Service)
115 1% 68% -67%
Having The Insolvency Service as a licenser,
regulator and dealing with cases themselves
89 12% 42% -30%
The amount the industry is regulated 91 19% 36% -17%
Source: cebr survey of R3 members, 2007
Our survey of insolvency professionals suggests that views
are divided over whether the regulatory regime is a strength
or weakness of the United Kingdom’s insolvency industry.
As Table 20 shows, a third (33 per cent) of respondents to
the survey reported that ‘the way the industry is regulated’
is a ‘strength’ of the regime. Slightly fewer (31 per cent)
said it is a ‘weakness’. The remaining 36 per cent reported
it is neither a strength nor a weakness; this a relatively low
number of neutral responses when compared to the other
issues covered by the survey. Out of the 21 issues within
the survey, it had the third highest number of responses.
The value of the insolvency industry
47
Speed of regulatory change. Over two-?fths (41 per •
cent) of respondents reported that ‘the speed at which
the regulators can adapt to a changing environment’ is
a weakness; eight per cent viewed it as a strength. Four
out of ten insolvency professionals (41 per cent) selected
the speed at which regulators can adapt to a changing
environment as a weakness, eight per cent selected it as
a strength. In contrast, 57 per cent reported the ability
of the industry to adapt to a changing environment as a
strength, only ?ve per cent selected it as a weakness. A
signi?cant factor behind the speed in which regulators
can adapt is coordinating the efforts of multiple parallel
regulators
Table 21 Balance of strengths and weaknesses
of the insolvency sector, percentage of
respondents, by type of company the
insolvency employee works, 2007
Type of company where insolvency employee works and balance selecting
strength rather than weakness
Factor Number of
respondents
Accountancy ?rm Insolvency
specialist ?rm
Law ?rm or
‘other’
The way the industry is regulated 105 -6% +6% +10%
The ?exibility of the industry 92 +59% +32% +32%
The consistency of the industry 83 -3% -23% -15%
The transparency of the industry 94 -14% +12% -4%
The ability to adapt to a changing environment 104 +12% -3% -4%
The speed at which the regulators can adapt to
a changing environment
81 -44% -33% -29%
Having 8 regulators (plus The Insolvency Service) 115 -70% -73% -67%
Having The Insolvency Service as a licenser,
regulator and dealing with cases themselves
89 -36% -36% -28%
The amount the industry is regulated 91 -25% -14% -11%
Number of respondents 146 132 54
Source: cebr survey of R3 members, 2007
Strong views were reported on certain aspects of the
regulatory regime:
Number of licensing bodies. Over two-thirds (68 •
per cent) of respondents reported that ‘having eight
regulators plus The Insolvency Service’ is a weakness;
only one per cent said it is a strength. The issue had the
highest number of responses. There was a concern that
the panoply of parallel regulators meant it was dif?cult
and time consuming to implement regulatory changes.
One expert we interviewed highlighted the dif?culty in
coordinating the efforts of the regulators, due to a lack
of time resource
Role of The Insolvency Service. Over two-?fths (42 •
per cent) of respondents reported that ‘having The
Insolvency Service as a licenser and regulator, and
dealing with cases themselves’ is a weakness. Twelve
per cent said it is a strength. Likewise, the majority of
the seven industry leaders and experts we interviewed
in depth ?agged the multiple roles of The Insolvency
Service as a concern
The value of the insolvency industry
48
Corporate versus individual responsibility. Three of the •
seven industry leaders and experts we interviewed in
depth raised the issue of legal responsibility. Prosecutions
can currently only be taken against the insolvency
practitioner and not the ?rm, which some fear creates
a problem with dealing with culpable companies
78
. This
is further exacerbated by the need for an insolvency
practice to have only one licensed practitioner regardless
of its size. There could be any number of people giving
advice, for instance over the telephone, and these
employees do not need to have the same level of training
78 Recently false selling of individual voluntary arrangements has became a
concern
As well as identifying potential problems with the regulatory
regime itself, the survey and interviews also provided
insight into certain characteristics of the industry that may
need to be addressed by regulators:
Consistency. Almost one third (31 per cent) of •
respondents to the survey reported that ‘the
consistency of the industry’ was a weakness.
Nineteen per cent cited it as a strength. A relatively
high balance of insolvency specialists (-23 per cent)
selected consistency as a weakness of the industry. In
comparison, a balance of -3 per cent of accountancy
?rm employees were concerned consistency is a
weakness
Transparency. Over one quarter (27 per cent) •
of respondents to the survey reported that ‘the
transparency of the industry’ was a weakness —
although slightly more (30 per cent) said it was a
strength. Practitioners based in insolvency specialist
?rms are more likely to report that transparency is a
strength (balance +12 per cent), whereas accountancy
based specialists are more likely to think transparency
is a weakness (-14 per cent). Transparency was
also a common theme in our depth interviews with
industry leaders and experts. Some cited the level
of communication with creditors and disclosure of
remuneration as examples of the industry’s lack of
transparency; while others voiced concerns about
a reported lack of openness in the regulation of the
industry
The value of the insolvency industry
49
5. The future of the insolvency industry
This chapter considers the future of the insolvency
industry. It examines likely future growth and threats and
opportunities to that growth.
The key ?ndings are:
1. Key to insolvency related growth over the next few years will be
macroeconomic trends. The current so-called ‘credit crunch’ and
slowdown in the economy are a catalyst for a tougher business
environment – putting pressure on the solvency of businesses and
individuals alike
2. However, there are other off-setting trends in the industry that look
likely to slow the rate of growth of insolvency businesses’ turnover in
the coming ?ve years. The rapid increase in the number of individual
voluntary arrangements will come to an end and levels are likely to
stabilise
3. Respondents to our survey expect turnover growth in the industry to
be at a slower pace over the next ?ve years. On average, turnover
is expected to grow by sixteen per cent in the next ?ve years in
comparison to twenty per cent over the last ?ve years
4. Our scenario analysis suggests individual insolvencies will remain above
100,000 a year after 2008. Individual insolvencies are likely to reach
between 120,000 and 140,000 by 2012. However, the risks are on the
upside, and according one scenario, insolvencies could rise to nearly
175,000 by 2012
5. Small changes in economic growth lead to signi?cant changes in
corporate failures. In our base scenario, corporate insolvencies rise
moderately; reaching a high of 18,000 in 2010 from 14,600 in 2008.
After the economy recovers, failures are expected to come down to
approximately 17,700 in 2012
6. With growth in international trade and emerging economies, the number
and importance of multi-national companies has expanded. Meanwhile,
businesses are becomingly increasingly footloose internationally. In this
context, there is now greater competition between jurisdictions to attract
locating and relocating businesses, as well as capital. In addition, this
is likely to move the focus of the insolvency industry further towards
turnaround rather than formal insolvency
7. Our research has highlighted areas that the industry and its regulators
may need to address to maximise all future opportunities. These areas
are: the responsiveness of the regulatory regime; consistency; the role of
The Insolvency Service; the cost of insolvency; and liability
The value of the insolvency industry
50
This so-called ‘credit crunch’ will exacerbate the matter,
and is likely to have both a short term and long term effect
(which we discuss in turn).
In the short term, higher credit costs are likely to force more
businesses and individuals into insolvency. The number
of new and renewed mortgages will also fall as house
prices fail to grow and the number of housing transaction
retreats. This is likely to increase the number of business
insolvencies, particularly for small independent ?nancial
advisors and estate agents.
The manufacturing sector may also be heavily affected.
The growth over the past four years in private equity, hedge
funds, mergers and acquisitions has been an important
boost for the sector. Activity in all these credit orientated
areas has slowed considerably.
Slower growth in consumers’ expenditure will cut
businesses’ pro?ts, putting upward pressure on business
failures across sectors but especially in retail.
Respondents from our survey recognised these factors
would be a source of growth in the insolvency industry,
as shown in Table 22. Of the insolvency professionals, 77
per cent indicated that changes in the interest rate, cost of
obtaining credit and the availability of credit would facilitate
growth in their industry; only ten per cent suggested it would
be a threat to growth. The balance of +67 per cent was the
highest of all issues considered. Changing levels of debt
were also seen to represent a potential driver of growth in
the insolvency industry by respondents, with 63 per cent
selecting the issue as an opportunity and six per cent
selecting it as a threat. The balance of +57 per cent was the
second highest of the issues considered.
In this chapter, we consider the future of the insolvency
industry, in particular, its likely growth, opportunities and
threats.
We ?rst discuss the main drivers of the insolvency
industry. Second, we consider the prospects for the
economic contribution of the insolvency industry. Third,
we analyse the prospects for individual insolvency. Fourth,
the prospects for corporate insolvency are examined in
more detail. In the ?fth section, we consider the long term
challenge of globalisation. The chapter concludes with
suggested areas of action.
5.1 The main drivers of growth in the
insolvency industry
In this section, we discuss the main drivers of the
insolvency industry over the next ?ve years.
Key to insolvency related growth over the next few years
will be a slowdown in the economy. The so-called ‘credit
crunch’, and the subsequent slowdown in the economy
predicted by many commentators, including us, will be
a catalyst for a tougher business environment – putting
pressure on the solvency of businesses and individuals
alike. However, there are other off-setting trends in the
industry that look likely to slow the rate of growth of
insolvency businesses’ turnover in the coming ?ve years.
We ?rst consider likely future economic growth and
how this may affect the demand for insolvency services.
Second, we consider how changes in the industry may
affect its growth.
A general economic slowdown was anticipated even
before the ?nancial turmoil in the credit markets, caused
by the fallout from the United States sub-prime mortgage
market.
The latest cebr forecasts are that United Kingdom real
gross domestic product growth will slow from 3.1 per cent
in 2007 to under two per cent in 2008. However, the build
up to the Olympics and recoveries in the United States
economy and in the United Kingdom housing market will
support the United Kingdom economy in 2009 and 2010.
As insolvencies tend to follow the economy with a lag of
one year, we expect that the main effect of the economy’s
slowdown will be felt by the insolvency sector in 2009
onwards.
The value of the insolvency industry
51
5.2 Prospects for the economic contribution
of the insolvency industry
In this section we explore the likely future growth of turnover
of the insolvency industry. We use evidence from our survey
of insolvency practitioners.
Growth in the insolvency industry has been strong over
the last ?ve years. Our survey of insolvency professionals
revealed that 29 per cent of respondents said insolvency
related turnover had increased by 50 per cent or more. A
further 43 per cent of respondents said turnover growth had
been between ten per cent and 49 per cent. Only six per
cent reported turnover had fallen, as shown in Figure 34.
The main driver for the rise in turnover has been an increase
in personal insolvencies, especially individual voluntary
arrangements (see chapter 2).
Table 22 Opportunities and threats to the
sector, percentage of respondents, United
Kingdom, 2007
Factor Number of
respondents
Percentage
‘opportunity’
Percentage ‘threat’ Balance
Changing levels of debt 114 63% 6% +57%
Changes in the interest rate / cost of obtaining
credit / availability of credit
144 77% 10% +67%
Changes in the numbers and value of private
equity deals, forms of structured debt and other
‘new’/’growing’ forms of debt
82 38% 11% +27%
Competition and the changing structure of the
sector - with changing size and numbers of
insolvency practices
86 39% 14% +24%
The strength of the economy 103 37% 25% +11%
Source: cebr survey of R3 members, 2007
In the longer term (after say four years), any tightening
of lending standards resulting from the current credit
crunch is likely to reduce the number of insolvencies. More
cautious creditors, a re-pricing of risk and fewer loans to
the sub-prime market will lead to more subdued growth
in consumer and business debt. This could reduce the
number of people getting in ?nancial dif?culty.
The rapid increase in the number of individual voluntary
arrangements will come to an end and levels are likely to
stabilise. However, growth in advice and rescue services
will support the insolvency industry. With continued
globalisation among businesses, there will be new
growth for insolvency professionals in serving the needs
of multinational and internationally footloose companies.
But, there may stronger competition between jurisdictions
and from insolvency ?rms abroad. This will place further
demands on domestic regulation and supervision of the
industry to ensure that the United Kingdom insolvency
profession keeps up and even ahead of international
competitors.
The value of the insolvency industry
52
Figure 34 Growth in insolvency-related turnover
over last ?ve years as reported by insolvency
professionals, United Kingdom
Source: cebr survey of R3 members, 2007, with standard error bars
As shown in Figure 35, respondents to our survey expect
turnover growth in the industry to be at a slower pace
over the next ?ve years. On average, turnover is expected
to grow by sixteen per cent in the next ?ve years in
comparison to twenty per cent over the last ?ve years.
Twelve per cent of people in the industry are expecting
insolvency related turnover to grow by 50 per cent or more
but nine per cent expect turnover to fall.
Figure 35 Expected growth in insolvency-related
turnover over next ?ve years as reported by
insolvency professionals, United Kingdom
Source: cebr survey of R3 members, 2007
We now compare the expected turnover in by the type of
?rm an insolvency professional is based.
Our survey results indicate that the average turnover
growth expected in the next ?ve years will be sixteen per
cent in both accountancy ?rms
79
and insolvency specialist
?rms
80
. Insolvency practitioners based in law ?rms
81
are
slightly more bullish, with an average expected turnover of
eighteen per cent. Of the insolvency practitioners based
in ?rms self-classi?ed as ‘other
82
’ the average expected
turnover growth is seventeen per cent.
5.3 Prospects for individual insolvencies
In this section, we discuss factors speci?c to the future
growth of individual insolvency. We then use this analysis
and our expectations of growth in the United Kingdom
economy to forecast the number of individual insolvencies.
The number of personal insolvencies began to rise
sharply in 2004 (see section 2.4). This was mainly due to
increasing numbers of individual voluntary arrangements.
However, after this rise in the number of individual voluntary
arrangement proposals, creditors began to reassess their
criteria for acceptance of proposals. This has led to an
increase in refusal of proposals
83
. In turn, the number of
individual voluntary arrangements began to retreat, as is
evident in ?gures for the last quarter of 2006 and the ?rst
three quarters of 2007, as seen in Figure 36.
79 Based on responses from 73 insolvency professionals based in accountancy
?rms
80 Based on responses from 66 insolvency professionals based in insolvency
specialist ?rms
81 Based on responses from fourteen insolvency professionals based in law
?rms
82 Based on responses from thirteen insolvency professionals based in ‘other’
?rms
83 McCambridge Duffy, Debt Resolution Forum, 2007; interviews with creditors
and insolvency industry experts, 2007
0%
5%
10%
15%
20%
25%
30%
35%
F
a
l
l
e
n
b
y
5
0
%
o
r
m
o
r
e
F
a
l
l
e
n
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
F
a
l
l
e
n
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
F
a
l
l
e
n
b
e
t
w
e
e
n
1
%
a
n
d
9
%
N
o
t
c
h
a
n
g
e
d
G
r
o
w
n
b
e
t
w
e
e
n
1
%
a
n
d
9
%
G
r
o
w
n
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
G
r
o
w
n
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
G
r
o
w
n
b
y
5
0
%
o
r
m
o
r
e
0%
5%
10%
15%
20%
25%
30%
35%
40%
F
a
l
l
b
y
5
0
%
o
r
m
o
r
e
F
a
l
l
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
F
a
l
l
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
F
a
l
l
b
e
t
w
e
e
n
1
%
a
n
d
9
%
N
o
c
h
a
n
g
e
G
r
o
w
b
e
t
w
e
e
n
1
%
a
n
d
9
%
G
r
o
w
b
e
t
w
e
e
n
1
0
%
a
n
d
2
4
%
G
r
o
w
b
e
t
w
e
e
n
2
5
%
a
n
d
4
9
%
G
r
o
w
b
y
5
0
%
o
r
m
o
r
e
The value of the insolvency industry
53
Figure 37 Number of personal bankruptcies,
thousand, England and Wales, 2005 - 2007
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
We now explore the likely future path of personal
insolvencies – individual voluntary arrangements and
personal bankruptcies. We have built an econometric
model
84
to quantify the impact of the drivers of total personal
bankruptcies.
The model
85
supported our view that personal insolvencies
have been driven by two main factors:
The economy •
Structural change •
We consider these in turn.
To estimate the effect of the United Kingdom economy we
used growth in United Kingdom gross domestic product
(GDP). The results of our modelling show, a one percentage
point fall in United Kingdom gross domestic product leads
to a rise in personal insolvencies of approximately 1,700 in
the year following.
Our modelling has also attempted to take account of recent
structural changes in the market. In particular, a heightened
awareness of insolvency options and a change in creditors’
propensity towards individual voluntary arrangements have
led to adjustments in the market. We use a dummy variable
to estimate the effect of these structural changes.
84 We used ordinary least squares regression to determine which factors had the
strongest causal relationship with total personal insolvencies. The methodology
is in section 6.6.
85 For more technical details on the model see section 6.6
Figure 36 Number of individual voluntary
arrangements, thousand, England and Wales,
2005 - 2007
Source: Insolvency Service, Statistical release: insolvencies in the third
quarter 2007, November 2007
Higher rejection of individual voluntary arrangements may
increase bankruptcies in future periods – as some of those
who have been refused an IVA will become bankrupt.
Others who are unable to get agreement on an IVA may
utilise a debt management plan instead, a route that
does not require the services of a licensed insolvency
practitioner.
Recent data show bankruptcies have not yet begun to
increase, as shown in Figure 37. However, a high rejection
rate could be a larger problem in the next few years when
personal ?nances are tightened.
0
2
4
6
8
10
12
14
2
0
0
5
Q
1
2
0
0
5
Q
2
2
0
0
5
Q
3
2
0
0
5
Q
4
2
0
0
6
Q
1
2
0
0
6
Q
2
2
0
0
6
Q
3
2
0
0
6
Q
4
2
0
0
7
Q
1
2
0
0
7
Q
2
2
0
0
7
Q
3
0
2
4
6
8
10
12
14
16
18
20
2
0
0
5
Q
1
2
0
0
5
Q
2
2
0
0
5
Q
3
2
0
0
5
Q
4
2
0
0
6
Q
1
2
0
0
6
Q
2
2
0
0
6
Q
3
2
0
0
6
Q
4
2
0
0
7
Q
1
2
0
0
7
Q
2
2
0
0
7
Q
3
The value of the insolvency industry
54
Figure 38 Gross domestic product growth, actual
and forecast, United Kingdom, 2000-2012
Source: Of?ce of National Statistics and cebr forecasts, 2007
The impact of changes to legislation and market reactions
are also unclear. In particular, the market may be affected
by:
continued increasing knowledge of the public of •
individual voluntary arrangements; greater awareness
of individual voluntary arrangements and a fall in the
stigma associated with them, could continue to increase
insolvencies
rejection of individual voluntary arrangement proposals; •
the recent increase in rejection of the proposals could
continue, this may keep growth in individual voluntary
arrangements low
higher rejection of individual voluntary arrangements, •
if this continues it could increase the number of
bankruptcies
the introduction of simple involuntary individual voluntary •
arrangements (commonly known as SIVAs), a high
demand for this new type of insolvency procedure could
increase the number of insolvencies
We now discuss our four scenarios, summarised in
Table 23.
The model con?rms our view that the new market to
channel individual voluntary arrangements led to an
exponential increase in individual
voluntary arrangement ?lings from
2002. Using the model, we estimate
as a direct result of market effects,
there have been approximately 3,900
compounding additional personal
insolvencies in every year since 2002.
In other words, in 2002 there were
an additional 3,900 insolvencies, in
2003 there were 7,900
86
additional
insolvencies, in 2004 there was
an additional 11,800
87
personal
insolvencies, etc. as a result of market
reactions.
We use our model to assess the likely
future path of personal insolvencies.
We analyse four scenarios
88
to better
understand the impact of possible
future events.
Our four scenarios are based on
varying the two main drivers of personal
insolvency: the economy and market
reactions.
Although cebr have been forecasting the economy on
a quarterly basis since 1993
89
the long-term impact
of the credit crunch is unclear and it is important to
understand how variances in our estimates effect predicted
insolvencies. Our latest forecasts are that United Kingdom
gross domestic product will grow by 1.8 per cent in 2008
but will rebound, reaching 2.6 per cent in 2010 and 3.0 per
cent in 2012, as seen in Figure 38.
86 Figures may not sum due to rounding
87 Figures may not sum due to rounding
88 The methodology is in section 6.6
89 Our forecasts are published by the treasury
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
UK GDP growth Predicted GDP growth
The value of the insolvency industry
55
Our recession scenario assumes that United Kingdom gross
domestic product growth will be two percentage points
lower than our base scenario in every year after 2007. In this
scenario, gross domestic product in the United Kingdom
falls by 0.2 per cent in 2008 and output fails to increase
in 2009. We retain the assumption in our base scenario
that creditors will continue to reject individual voluntary
arrangements and that the introduction of SIVAs will have
limited impact on total insolvencies. In this scenario the
number of individual insolvencies rises to 119,000 in 2010
and 127,300 in 2012.
The dam effect scenario assumes the same economic
growth as in the base scenario. In this scenario we assume
that bankruptcies will increase in response to creditors
increasing the number of individual voluntary arrangements
they reject. For illustrative purposes, we have assumed
twenty per cent of refused individual voluntary arrangement
proposals that have been rejected become bankrupt. In
2009 individual insolvencies reach 118,300 and in 2012
bankruptcies reach 133,600. It is interesting to note that
our dam effect has more of an in?uence on individual
insolvencies than reducing economic growth by two
percentage points.
Table 23 Assumptions for possible
future scenarios
Scenario Economic environment Market environment
Base In line with latest cebr forecasts Creditors current rejection rate of IVA proposals continues, limited impact
on bankruptcies.
SIVAs have limited impact
Recession UK annual GDP growth two
percentage points lower than cebr
forecasts
Creditors current rejection rate of IVA proposals continues, limited impact
on bankruptcies.
SIVAs have limited impact
Dam effect In line with latest cebr forecasts Bankruptcies increase in response to creditors increasing the number of
individual voluntary arrangements they reject
Strong reaction to
introduction of SIVAs
In line with latest cebr forecasts Introduction of SIVAs creates a market response similar to that of the
response of increased awareness of individual voluntary arrangements
Source: cebr survey of R3 members, 2007
For our base scenario, we assume United Kingdom
economy grows inline with the latest cebr forecasts. We
also assume creditors will continue to reject individual
voluntary arrangements and this will have only a limited
impact on the number of people going into bankruptcy.
Finally, we assume that the introduction of simple
involuntary individual voluntary arrangements will have only
a limited impact on total insolvencies.
In this scenario, individual insolvencies rise from 108,000 in
2008 to 112,300 in 2010. The number is likely to remain at
a similar level in 2011 and 2012 as the economy recovers.
Our estimates can be seen in Figure 39.
Figure 39 Number of personal insolvencies,
Actual and predicted in base scenario,
thousand, England and Wales, 2000-2012
Source: Insolvency service and cebr forecasts, base scenario, 2007
0
20
40
60
80
100
120
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Personal insolvencies Central forecast
The value of the insolvency industry
56
5.4 Prospects for corporate failures
In this section we forecast the number of corporate failures.
We examine two scenarios and their impact on business
failures.
Unlike personal insolvencies where recent trends have
been dominated by structural changes relating to individual
voluntary arrangements, there have been few signi?cant
speci?c industry factors affecting the number of business
failures. Instead, company insolvencies have followed a
pattern that broadly re?ects the underlying performance
of the United Kingdom economy. We built an econometric
model
90
to analyse this relationship in more detail and
quantify the impact of a changing economic environment on
business insolvencies.
The model con?rmed our view that corporate insolvencies
are highly sensitive to growth in the United Kingdom
economy one year previously
91
. The results of the modelling
suggest that a one percentage point reduction in gross
domestic product leads to an increase of 2,500 business
insolvencies one year following.
We now use the model to explore the future path of
corporate insolvencies. We analyse two scenarios:
Base scenario •
Recession •
The scenarios are summarised in Table 24. The results of
the modeling are given in Figure 41.
Table 24 Assumptions for possible future
scenarios
Scenario Economic environment
Base UK annual GDP growth in line with latest cebr
forecasts
Recession UK annual GDP growth two percentage points
lower than cebr forecasts
Source: cebr survey of R3 members, 2007
As in our base scenario for personal insolvencies, in our
base scenario for corporate insolvencies, we assume the
United Kingdom’s economy will grow according to cebr’s
latest economic forecasts. Gross domestic product will
increase by 1.8 per cent in 2008, rising to 3.0 per cent in
2012, as in Figure 38.
90 We used ordinary least squares regression to determine which factors had the
strongest causal relationship with total personal insolvencies. The methodology
is in section 6.6
91 For more technical details on the model see section 6.6
In our strong reaction to SIVAs scenario, we assume
that the introduction of SIVAs creates a market response
similar to that resulting from the increased awareness of
individual voluntary arrangements. We assume the same
economic growth as in our base scenario. This has the
highest growth in insolvencies out of the four scenarios
examined. The number of individual insolvencies reaches
136,000 in 2010 and 173,100 in 2011. However, it is
unlikely this level of growth is sustainable and it is doubtful
the market reaction to SIVAs will be the same as that which
followed the increased awareness of individual voluntary
arrangements.
Figure 40 shows all of the different scenarios modelled.
Figure 40 Scenarios for the number of personal
insolvencies, thousand, England and Wales,
2000- 2012
Source: Insolvency service and cebr analysis, 2007
The scenario analysis suggests individual insolvencies
will remain above 100,000 a year after 2008. In our view,
combining our economic forecasting expertise with the
views gathered from the industry interviews and results
from our survey of insolvency professionals, the most
likely outcome will be around our base and ‘dam effect’
scenarios. This implies individual insolvencies would reach
between 120,000 and 140,000 by 2012. However, the
risks are on the upside, and according to our ‘strong
reaction to SIVAs scenario’, insolvencies could rise to
nearly 175,000 by 2012.
0
20
40
60
80
100
120
140
160
180
200
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Individual insolvencies Base scenario Recession
Strong reaction to SIVAs Dam effect
The value of the insolvency industry
57
This scenario analysis also focuses on the formal corporate
insolvency. However, the main change in the corporate
sector over the next few years is likely to be a move towards
more informal process rather than formal insolvency. This
point was discussed in the majority of our seven expert
interviews and is part of the current trend noted by the
experts. Further evidence that supports this is that the
average size of a company has grown and larger companies
are more likely to be rescued rather than put through formal
insolvency proceedings (see section 3.3). We expect the
trend towards larger company sizes and rescue to continue.
5.5 The long term challenge of globalisation
In this section, we discuss the longer term challenge
of globalisation. The trends in personal and corporate
insolvencies discussed in sections 5.3 and 5.4 are based on
the domestic United Kingdom market. However, there is an
opportunity for additional growth from international sources.
With growth in international trade and emerging economies,
the number and importance of multi-national companies
has expanded. Meanwhile, businesses are becomingly
increasingly footloose internationally. In this context, there
is now greater competition between jurisdictions to attract
locating and relocating businesses, as well as capital.
The insolvency profession may bene?t from this, as it has
a potentially larger market — including both domestic
businesses and the internationally footloose. Growth in
the international trade of ?nancial and businesses services
suggests that this trend is happening in other sectors similar
to the insolvency profession. Total world trade accounts for
28 per cent of the global economy
93
.
The European Union has proved more competitive in terms
of service exports than most other large economies. Its
export values have grown by twelve per cent per annum
against a background of ten per cent average annual growth
worldwide. Table 25 presents World Trade Organisation data
on the value of world exports by sector. Exports in insurance
and ?nancial services were worth €47 billion and €112
billion respectively in 2005 and account for two per cent of
total world exports. Exports in services totalled €1.9 trillion
in 2005, of the service sector exports, 78 per cent are in
transportation, travel and other business services.
93 World Trade Organisation, International Trade Statistics 2006. Exports include
Intra-EU trade; ?gures may not sum due to rounding.
Using this scenario, our model predicts formal corporate
insolvencies will rise moderately; reaching a high of 18,000
in 2010 from 14,600 in 2008. After the economy recovers,
failures are expected to come down to approximately
17,700 in 2012. Our estimates can be seen in Figure 41.
In our recession scenario, we analyse the impact of a
recession on corporate failures. The model uses United
Kingdom gross domestic product growth estimates two
percentage points lower than our central scenario in every
year from 2008, inclusive. Gross domestic product in the
United Kingdom falls by 0.2 per cent in 2008 and output
fails to increase in 2009. Between 2010 and 2012 the
economy fails to grow by more than a one per cent per
annum. In this scenario the number of corporate failures
rises to 27,900 in 2010 and 37,400 in 2012. However,
such a sustained period of low economic growth has only
occurred once since 1949 and is unlikely to occur in the
foreseeable future.
Figure 41 Number of business failures, actual
and predicted, thousand (RHS), England and
Wales, and Gross domestic product growth,
United Kingdom, 2000-2012
Source: Insolvency Service, Of?ce of National Statistics and cebr
forecasts, 2007
The scenario analysis highlights the importance of
economic growth to businesses and the insolvency
industry. Small changes in economic growth lead to
signi?cant differences in corporate failures
92
.
92 It should also be noted that our model is a simpli?ed abstract of a multivariable
world; it contains only two independent variables and, as such, may be over-
sensitive to changes in gross domestic product. More details on the model are
in section 6.6
0
5
10
15
20
25
30
35
40
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Total company failures (LHS) Base scenario Recession
The value of the insolvency industry
58
How the United Kingdom compares internationally will be
important — as national jurisdictions compete with one
another as hosts to increasingly footloose global companies.
As the ability to choose the location for a base increases,
debtors, creditors and insolvency practitioners will locate
where the insolvency regime best suits their needs.
Parallel to business globalisation, further coordination
and integration among European Union member states is
likely. This has its bene?ts: the United Kingdom insolvency
industry is already bene?ting from access to a wider pool
of professionals from across the continent — while there is
progress towards a single market in services. However, this
also brings additional pressures on the domestic regime —
especially in ensuring consistent regulation and licensing
of domestic and European practitioners — and uncertainty
over the future locus of regulations: Brussels or London?
Nearly a quarter (24 per cent) of respondents to our survey
reported European regulations were a threat; only thirteen
per cent saw opportunity.
Table 25 World exports, €billion, 2005
World exports Exports, €billion
Total world exports 10,100
Of which:
Merchandise 8,200
Services 1,900
Of which: Travel 550
Transportation 460
Royalties and license fees 131
Financial services 112
Computer and information services 75
Insurance services 47
Communication services 37
Construction services 37
Personal, cultural and recreational services 28
Other business services 467
Source: World Trade Organisation, International Trade Statistics 2006.
Exports include Intra-EU trade; ?gures may not sum due to rounding.
The United Kingdom is well placed to take advantage
of this growth. London is already a centre for ?nance
and business. Our survey of insolvency professionals
revealed that 26 per cent of respondents felt globalisation
represented an opportunity. However, a further eight per
cent perceived it as a threat, leaving a balance of +18 per
cent. Survey results are in Table 26.
There are several important implications of globalisation on
the insolvency industry:
There will be more larger businesses in ?nancial dif?culty •
There will be further consolidation across all sectors, •
including the insolvency industry
How the United Kingdom is perceived internationally will •
have more of an importance for the insolvency industry
The European Union will have more of an in?uence on •
the insolvency industry
Larger and more complex entities require different
services from the insolvency profession than their smaller
counterparts. As the average size of a business grows,
in the future it is likely that larger businesses will end up
in ?nancial dif?culty. In general, there is a greater role for
informal advice and recovery measures, and less emphasis
on using formal insolvency procedures.
There will be further industry consolidation in the insolvency
industry as ?rms acquire the economies of scale necessary
to service global clients. But larger ?rms will place further
pressure on the domestic regulatory and licensing regime
which is focused on the individual insolvency practitioners,
rather than ?rms.
The value of the insolvency industry
59
future contribution and growth prospects of the industry are to
be maximised.
We now consider the ?ve areas where the industry could
improve.
First, improving the responsiveness of the regulatory regime is an
area for consideration. The questionnaire responses indicated
a stark contrast of views between the ability of the industry
to respond to a changing regulatory environment and the
speed at which regulators adapt to a change in the regulatory
environment. Four out of ten insolvency professionals (41 per
cent) selected the speed at which regulators can adapt to a
changing environment as a weakness, eight per cent selected it
as a strength. In contrast, 57 per cent reported the ability of the
industry to adapt to a changing environment as a strength, only
?ve per cent selected it as a weakness.
A signi?cant factor behind the speed in which regulators can
adapt is coordinating the efforts of multiple parallel regulators.
Our survey of insolvency practitioners revealed that having
multiple regulators is their biggest concern: 68 per cent
of respondents selected having eight regulators plus The
Insolvency Service as a weakness of the sector; only one per
cent selected it as a strength. Expert interviews revealed that
a lack of resource means it is dif?cult to implement changes
quickly.
Different degrees of responsiveness are critical as the industry
and its regulator face up to some important changes in the
next few years. These changes include:
growth in international trade and emerging economies. •
The number and importance of multi-national companies
has expanded. Meanwhile, businesses are becomingly
increasingly footloose internationally. In this context, there
is now greater competition between jurisdictions to attract
locating and relocating businesses, as well as capital. In
addition, this is likely to move the focus of the insolvency
industry further towards turnaround rather than formal
insolvency
Table 26 Threats and opportunities to the
sector, percentage of respondents, United
Kingdom, 2007
Factor Number of
respondents
Percentage
‘opportunity’
Percentage
‘threat’
Balance
Globalisation 56 26% 8% +18%
EU regulations 61 13% 24% -11%
The speed at which the regulators can adapt to a
changing environment
71 8% 34% -24%
The ability to adapt to a changing environment 62 31% 6% +25%
Source: cebr survey of R3 members, 2007
5.6 Study key conclusions
In this section, we summarise the key conclusions of
our study.
The industry provides a signi?cant contribution to employment
and gross domestic product to the United Kingdom
economy. There are an estimated 12,700 jobs employed
directly in the industry; its gross value added is an estimated
£780 million per annum, equivalent to 0.08 per cent of the
national economy (as seen in section 3.1). The insolvency
industry’s purchases from suppliers, and the spending by its
employees, accounts for a further £417 million of national
output (as seen in section 3.2).
In addition, the industry provides support for both individuals
and corporations in ?nancial dif?culty. Based on our survey
of insolvency professionals, we estimate the industry is
responsible for saving 910,000 jobs in 2006. The businesses
which are saved are estimated to contribute £132 billion in
turnover. These results are in section 3.3.
Importantly, the industry creates an environment that is
conducive for entrepreneurship and appropriate risk taking.
The United Kingdom regime performs well by having both
an ef?cient insolvency regime and one where the debtors’
and creditors’ interests are well balanced. In an international
comparison of 127 countries, the United Kingdom is ranked
tenth largest in terms of the amount recovered by creditors
when a business is closed and joint ninth fastest for the time it
takes to close a business. Our analysis suggests that regimes
that perform well on these measures of creditor protection
and insolvency ef?ciency are also economically vibrant; they
are more prosperous, invest more and have faster rates of
economic growth.
5.7 Areas for review and possible action
Although the thrust of our research has been to identify and
quantify the contribution made by the insolvency industry to
the United Kingdom economy, it has highlighted areas that
the industry and its regulators may need to address if the
The value of the insolvency industry
60
In section 4.2 we identify that the cost of closing a business in
the United Kingdom is relatively poor in comparison to other
international jurisdiction – the United Kingdom was ranked
22nd with the average cost estimated to be six per cent of
the value of the estate. Our survey of insolvency professionals
revealed that 23 per cent of insolvency professionals thought
the cost of the procedures was a weakness of the industry,
while only eight per cent selected it as a strength.
Two important points of clari?cation need to be made regarding
this issue. First, the cost of closing a business is not the same
as insolvency practitioners’ fees. Rather, this represents just
one element in the cost of closing the business which also
includes court costs, fees of independent assessors, lawyers
and accountants. Second, the analysis of the World Bank
data suggested that the cost of closing a business was less
important in promoting economic activity and growth than
a number of other aspects of the insolvency industry i.e. the
amount recovered when a business is closed and the time
taken to close a business – all of which the United Kingdom
performs well on. Nonetheless, the analysis does suggest that
the cost of business closure is worthy of further investigation.
The ?rst stage of any such action would be to identify the
relative importance of different aspects of the cost of closing
a business and how these compare with jurisdictions where
costs appear to be lower. This will help identify the extent to
which costs in the United Kingdom are ‘industry’ costs or,
for instance, costs (inappropriately) incurred by the legal and
regulatory framework. Action could then be targeted at the
areas where costs appear high by international standards.
Fifth, liability was an issue raised during our research. The
report identi?ed how the insolvency industry is already
polarised and, in particular, the growth of large insolvency ?rms.
These trends will only be enhanced by the further impacts of
globalisation on the industry, as discussed in section 5.5. In an
environment in which insolvency advice and support is being
administered by ?rms with in excess of ?ve thousand people,
regulatory framework which is focused on individual insolvency
practitioners may no longer be ?t for purpose.
possible stronger competition between jurisdictions •
and from insolvency ?rms abroad. This will place further
demands on domestic regulation and supervision of the
industry to ensure that the United Kingdom insolvency
profession keeps up and even ahead of international
competitors
the so-called ‘credit crunch’, and the subsequent •
slowdown in the economy. This will be a catalyst for a
tougher business environment – putting pressure on the
solvency of businesses and individuals alike
The precise way in which the regulatory framework should
evolve to deal with these inter-related challenges is beyond
the scope of this report. However, we note again the
problems potentially caused by a multiplicity of parallel
regulators: meaning that not just one regulator needs to be
responsive to the changing environment but instead all nine.
Second, the consistency of the industry was highlighted
as a weakness. Again the survey identi?ed that a lack
of consistency within the industry represented a key
weakness: 31 per cent of respondents felt the industry
lacked consistency, nineteen per cent selected it as a
strength. The industry experts that we interviewed said
that although the regulation was consistent, and there was
much communication across regulators, the structure of
regulators can give the impression that that the industry lacks
a consistency.
Third, many of the experts we interviewed felt that the multiple
roles of The Insolvency Service led to possible con?icts of
interest. Our survey of insolvency practitioners revealed that
almost half the industry (42 per cent) thought the multiple
roles was a weakness. Just ?ve per cent selected it as a
strength. Industry experts cited several problems, including:
being a licenser and also regulating other licensees leads •
to problems with transparency as it is not clear who
regulates The Insolvency Service
dealing with cases themselves may affect The Insolvency •
Service’s incentives. Although some felt there was a role
for the industry in dealing with some cases that are not
suitable for some insolvency practitioners – for instance
when there has been illegalities – interviewees thought that
there should be a clearer line as to what was within The
Insolvency Service’s jurisdiction and what was not
there was concern that the insolvency practitioners •
licensed by The Insolvency Service were not as fully
monitored
Fourth, the cost of insolvency was highlighted as a relative
weakness of the United Kingdom’s regime in our international
comparative analysis, our interviews with industry experts and
in the responses to our internet survey of R3 members.
The value of the insolvency industry
61
6. Appendix: Explanatory notes
This appendix provides further detailed illustration and
explanation of some of the issues, calculations and
analyses reported in the main chapters of this report.
We provide nine notes:
Analysing the survey results •
Determining the employment in the insolvency industry •
Measuring the indirect economic contribution of the •
insolvency industry
Calculating the number of jobs saved by the industry •
Analysing the wider economic contribution of the •
insolvency industry
Forecasting individual and corporate insolvencies •
The industry experts we interviewed •
Bibliography of literature used in the compiling of this report •
The survey of the insolvency professionals and their •
responses
The value of the insolvency industry
62
Given a population size, statistical con?dence in survey
results depend on two main factors:
The sample size, • n
Variance of responses, • ?
2
The standard error takes into account these factors. We
state the standard error in order to give a level of accuracy
to results. The standard error is calculated as:
;
Where:
S.E • = the standard error
? • = standard deviation
? •
2
= variance
n • = sample size
In our ?gures that report survey results we include the
standard error as a measure of accuracy. The following
equation is used:
;
Where:
S.E • = the standard error
s • = series number
i • = point number in series s
m • = number of series for point y in chart
n • = number of points in each series
y •
is
= data value of series s and the ith point
n •
y
= total number of data values in all series
6.1 Analysing the survey results
In this section we discuss the details of the survey
we conducted of the members of R3. We explain the
weighting system we used and the accuracy of the results.
The survey results are used throughout the report.
We sent an email survey to all members of R3. A copy of
the survey and its results is in Section 6.9. We had a total
of 169 responses:
109 classi?ed themselves as insolvency practitioners •
One insolvency regulator responded •
Nineteen respondents classi?ed themselves as a •
turnaround professional
Fifteen classi?ed themselves as a student or in training •
22 respondents classi?ed themselves as none of •
above, but declared they worked in insolvency or in an
insolvency related industry
Two of the respondents were either retired or inactive •
in insolvency sector. If this option was selected the
respondent was not asked any further questions
One person declared that they had nothing to do with •
insolvency or an insolvency related business. This
person was not asked any further questions
We now discuss the accuracy of our survey results.
There are 1774 insolvency practitioners licensed in the
United Kingdom. The number of responses from people
who classi?ed themselves as insolvency practitioners
was 109. Therefore 6.14 per cent of all United Kingdom
insolvency practitioners responded. This can be seen
as a minimum response rate because a share of those
classi?ed as ‘turnaround professionals’ are likely to be
licensed insolvency practitioners
94
. Such as response rate
is generally seen as a robust sample for analysis
95
. Given
the population size, number of responses and assuming
a conservative measure of variance in responses, we
are 95 per cent certain that our responses are within
approximately +/-15 per cent of accuracy
96
.
A further indication of con?dence of results is the standard
error.
94 Of the turnaround professionals 58 per cent said they were regulated or
licensed by an insolvency regulator – implying they are licensed insolvency
practitioners.
95 As stated in Fred Van Bennekom, Principal Great Brook Consulting
96 Fred Van Bennekom, Principal Great Brook Consulting
The value of the insolvency industry
63
6.2 The number people employed by the
insolvency industry
In this section we discuss our methodology for calculating
the number of people employed in the United Kingdom
insolvency industry. The results of this analysis are presented
in sections 2.5 and 3.1.
To determine the number of people employed in the industry
we analsyed company accounts of ?rms that classi?ed
themselves as ‘insolvency practitioners’. This information
was used alongside information obtained from The
Insolvency Service on the number of insolvency practitioners
in ?rms.
There are 714 companies in the United Kingdom that
employ insolvency practitioners according to Insolvency
Service information.
According to Companies House, there are 407 businesses
registered with then that classify themselves as insolvency
practitioners. We examined 300 of these companies; 74 per
cent of insolvency specialist ?rms registered on Companies
House. There were 124 matches that could be assessed in
more detail. We then used the following formula to calculate
the total employment in the insolvency industry:
Where:
e • = employee
p • = insolvency practitioner j
j • = individual employee
i= individual insolvency •
J= • total number of individuals
k • = ?rm
K = • total number of ?rms
ep
• = number of employees per practitioner
H • = number of insolvency practitioners in population
Emp • = Total employment in insolvency industry
The standard error bars are a type of con?dence interval.
Con?dence intervals are frequently used in statistics to
state the degree of accuracy. For instance, 95 per cent
con?dence levels are commonly used. Con?dence intervals
can be calculated by using the following formula:
Where:
CI • = con?dence interval
x
•
= the mean average of the sample
t • = the t statistic
The t statistic can be found in standard ‘t-tables’
97
. The
value depends on the level of con?dence required. For
instance the t value for a 95 per cent con?dence interval
is 1.96. Therefore, 95 per cent con?dence levels on charts
are almost double the size of the standard error bars.
Similarly, standard error bars are con?dence levels with a
t statistic of one. This is equivalent to a con?dence level of
68.3 per cent, i.e. a 15.9 per cent two-tailed test.
Another factor that may affect the robustness of our survey
results is sample bias. If there is a larger sample of one
‘type’ of respondent, and this is not a true re?ection of the
population as a whole, results can be skewed towards
opinions and facts about that ‘type’ of respondent.
For instance, insolvency practitioners that work for an
insolvency specialist ?rm may have different variables
(for instance wages, opinions, etc.) than an insolvency
practitioner working for an accountancy ?rm. If a larger
share of accountancy practitioners respond to the survey
this could skew results. We therefore weight survey
responses according to the type of business the insolvency
practitioner works in.
97 T-tables list values for t-distributions with degrees of freedom for a range of
given con?dence intervals
The value of the insolvency industry
64
To calculate the total number of jobs saved in the industry
per year we used the responses from the following
questions asked in our survey of insolvency professionals:
Thinking of the last ?ve businesses that you worked with…
What as the nature of the work? – we took responses for •
formal insolvency and, separately, for rescue
When did the process begin? – we took responses for •
‘this month’ and ‘within the last year’ only.
How many people were employed when the process •
began?
How many people were employed when the process •
?nished? – the number of people employed when the
process was completed gives the number of jobs saved.
We used the following equation to calculate the total
number of jobs saved by the industry
Where:
f • = actual number of business failures
f
ˆ
• = number of business failures according to survey
sˆ • = number of jobs saved according to survey
s • = estimated total number of jobs saved
We also calculated the total ?nancial contribution (i.e.
turnover) of the companies that have been through formal
and informal insolvency proceedings. Again, the most
conservative measures were used when estimating the
results. To calculate turnover the following equation was
used:
Where:
f • = actual number of business failures
t • = ?rm’s turnover
e = • employment in ?rm
T= • total turnover
K = • ?rm
• = average turnover per employee
6.3 Estimating the indirect contribution of
the insolvency sector
In this section we explain our methodology for calculating
the indirect contribution of the insolvency industry through
multiplier effects. The results of this analysis are presented
in section 3.2.
We built a model to calculate upstream gross value added,
turnover and spend. This model uses the Of?ce of National
Statistics ‘Input-Output tables’. These tables are available
for the years 1999 to 2005. They are a matrix detailing
the amount of goods and services each sector provides
each other sector in the United Kingdom. Using the links
to other sectors we determine the support an industry
provides a sector — the upstream effect. This is calculated
in terms of gross value add, turnover and spend. We use
a similar technique to determine employee spend but
this takes into account the mean gross annual pay for all
employee jobs in each sector.
Where GVA and turnover sector data is missing for smaller
sectors the model uses employment data to ?nd how the
larger sector should be broken into the smaller sectors.
The model also includes a ‘mapping’ to make the input
output categories consistent with the standard industrial
classi?cation codes.
6.4 The number of jobs saved by the
insolvency industry
In this section we outline our methodology for determining
the number of jobs saved by the insolvency industry. The
results of this analysis are presented in section 3.3.
A person employed in a company following formal
insolvency proceedings is de?ned as having their job
retained, or ‘saved’. This does not necessarily mean that
those who have had their job ‘saved’ would become
unemployed if an alternative to insolvency proceedings had
taken place.
Of?cial ‘jobs saved’ numbers are not available. However,
we do have of?cial ?gures for the number of businesses
that went through insolvency proceedings up to the
third quarter of 2006. These ?gures are used to insure
that results extrapolated from the survey are consistent
with of?cial data. Similarly for the ?nancial turnover of
businesses, we evaluate survey results alongside of?cial
data to ensure ?gures were robust. Adjustments were
made accordingly. When estimating ?gures we used the
most conservative measures. We also made additional
calculations to check our ?gures were consistent with other
data available.
The value of the insolvency industry
65
Borrowed from a domestic bank 5 years ago (the •
loan has 10 years to full repayment) and bought real
estate (the hotel building), using it as security for the
bank loan.
Has observed the payment schedule and all other •
conditions of the loan up to now.
Has a mortgage, with the value of the mortgage •
principal being exactly equal to the market value of
the hotel.
Assumptions about the case
The business is experiencing liquidity problems. The
company’s loss in 2006 reduced its net worth to a
negative ?gure. There is no cash to pay the bank interest
or principal in full, due tomorrow. Therefore, the business
defaults on its loan. Management believes that losses
will be incurred in 2007 and 2008 as well.
The bank holds a ?oating charge against the hotel in
countries where ?oating charges are possible. If the
law does not permit a ?oating charge but contracts
commonly use some other provision to that effect, this
provision is speci?ed in the lending contract.
The business has too many creditors to negotiate
an informal out-of-court workout. It has the following
options: a judicial procedure aimed at the rehabilitation
or reorganization of the business to permit its continued
operation; a judicial procedure aimed at the liquidation
or winding up of the company; or a debt enforcement
or foreclosure procedure aimed at selling the hotel
either piecemeal or as a going concern, enforced either
in court (or through a government authority like a debt
collection agency) or out of court (for example, by
appointing a receiver).
Time
Time is recorded in calendar years. Information
is collected on the sequence of procedures and
on whether any procedures can be carried out
simultaneously. Potential delay tactics by the parties,
such as the ?ling of dilatory appeals or requests for
extension, are taken into consideration.
6.5 Estimating the wider economic
contribution of the insolvency industry
using World Bank data
In this section we explain our methodology for examining
the economic contribution of the insolvency industry. The
results of this analysis are presented in section 3.4.
We use data from the World Bank
98
to analyse business
conditions in 175 countries and compare this to economic
prosperity and growth. The purpose of our analysis is
to understand which of the measures of ‘ease of doing
business’ are most strongly linked with the prosperity of a
country and its entrepreneurial climate.
The World Bank data contains a collection of 39 objective
measures of business regulations and their enforcement
across 175 countries. Within these measures, there are
three that are directly related to the insolvency sector and
regime within a country: recovery rate when a business
fails; length of time to close a business; cost of closing a
business.
The World Bank describes how these estimates have been
made:
Doing Business studies the time, cost and outcomes
of bankruptcy proceedings involving domestic entities.
The data are derived from survey responses by local
insolvency practitioners and veri?ed through a study of
laws and regulations as well as public information on
bankruptcy systems.
To make the data comparable across countries, several
assumptions about the business and the case are
used.
Assumptions about the business
Is a limited liability company. •
Operates in the country’s most populous city. •
Is 100% domestically owned, with the founder, •
who is also the chairman of the supervisory board,
owning 51% (no other shareholder holds more than
5% of shares).
Has downtown real estate, where it runs a hotel, as •
its major asset.
Has a professional general manager. •
Has had average annual revenue of 1,000 times •
income per capita over the past 3 years.
Has 201 employees and 50 suppliers, each of which •
is owed money for the last delivery.
98 World Bank and International Finance Corporation, Doing Business 2007 ‘How
to reform’, 2007
The value of the insolvency industry
66
Some are not related to the insolvency sector e.g. the
dif?culty in hiring workers, number of procedures to start a
business, cost of importing and others. We compared the
ease of business indicators with measures of economic
performance.
We used correlation analysis to determine the strength
of the relationship of each of the ease of doing business
indicators with the following economic indicators:
National GDP per capita sourced from Penn world •
tables
99
Investment as a proportion of total GDP (on the basis that •
investment levels are an important driver of the long term
growth rate of an economy), from Penn tables
Economic growth, measured as annual change in gross •
domestic product
We discuss the results of our analysis of each of the above
economic indicators in turn.
Our results show that the indicator that had the strongest
correlation with GDP per capita is the overall ease of doing
business indicator. This has a correlation of -0.82 and
shows the strength of the link between a mature business
environment and a strong economy.
The indicator that has the second strongest relationship
with the economy is the recovery rate when a business is
closed (i.e. the proportion of debts that are recovered in the
event of business failure). Out of all the individual variables,
the recovery rate had the strongest association with the
prosperity of an economy. This suggests that the more
con?dent creditors in a country can be regarding repayment,
the more likely it is that the economy will be prosperous.
The analysis also showed that the time it takes to close a
business had a strong correlation
100
with GDP per capita:
of the 39 variables that correlated against GDP per capita,
the time taken to close a business had the twelfth highest
correlation (at -0.52).
The ‘cost of closing a business
101
’ had a correlation
coef?cient of -0.46. This suggests that as the cost of closing
a business falls, a country is more likely to be prosperous,
and vice-versa. The cost of closing a business is measured
as the percentage of the cost of the estate.
99 Center for International Comparisons of Production, Income and Prices, Penn
world tables, 2007
100 The correlation coef?cient indicates the strength and direction of a linear
relationship between two variables. The value 1 indicates a perfect increasing
linear relationship, the value ?1 a perfect decreasing linear relationship. The value
zero indicates no relationship. The closer the coef?cient is to either ?1 or 1, the
stronger the relationship between the variables.
101 Costs include all of?cial costs, such as court costs, fees of insolvency
practitioners, independent assessors, lawyers and accountants.
Cost
The cost of the proceedings is recorded as a
percentage of the estate’s value. The cost is calculated
on the basis of survey responses by insolvency
practitioners and includes court fees as well as fees
of insolvency practitioners, independent assessors,
lawyers and accountants. Respondents provide cost
estimates from among the following options: less
than 2%, 2–5%, 5–8%, 8–11%, 11–18%, 18–25%,
25–33%, 33–50%, 50–75% and more than 75% of the
value of the business estate.
Recovery rate
The recovery rate is recorded as cents on the dollar
recouped by creditors through the bankruptcy or
insolvency proceedings. The calculation takes into
account whether the business emerges from the
proceedings as a going concern as well as costs and
the loss in value due to the time spent closing down.
If the business keeps operating, no value is lost on the
initial claim, set at 100 cents on the dollar. If it does
not, the initial 100 cents on the dollar are reduced
to 70 cents on the dollar. Then the of?cial costs of
the insolvency procedure are deducted (1 cent for
each percentage of the initial value). Finally, the value
lost as a result of the time the money remains tied
up in insolvency proceedings is taken into account,
including the loss of value due to depreciation of the
hotel furniture. Consistent with international accounting
practice, the depreciation rate for furniture is taken
to be 20%. The furniture is assumed to account for a
quarter of the total value of assets. The recovery rate is
the present value of the remaining proceeds, based on
end-2006 lending rates from the International Monetary
Fund’s International Financial Statistics, supplemented
with data from central banks.
This methodology was developed in Ef?ciency in
Bankruptcy, an ongoing research project by Simeon
Djankov, Oliver Hart, Caralee McLiesh and Andrei
Shleifer.
Source: World Bank/IF,http://www.doingbusiness.org/
MethodologySurveys/ClosingBusiness.aspx
The value of the insolvency industry
67
6.6 Forecasting individual and corporate
insolvencies
In this section we explain our methodology for determining
the drivers of corporate and individual insolvency. We also
explain how we used this, alongside other information,
to forecast the number of individual and corporate
insolvencies.
To understand and quantify the main drivers of personal and
corporate insolvencies we built an econometric model.
Econometric modeling is a widely used method for
forecasting. Our models were built by calculating the best
?tting relationship between variables through regression
analysis. The ordinary least squares regression looks at the
historical relationship between the dependent variable – the
variable we wish to predict – and explanatory variables – the
other variables in the model.
Our econometric model is de?ned by the following
regression equations:
Where:
y • = actual number of company/ personal insolvencies
yˆ • = predicted company/ personal insolvencies
t • = time = 1989,…,2006
t
ˆ • = time period used for forecasts = 2007,…,2012
• = coef?cient
? • = estimated coef?cient
x • = variables
xˆ
• = forecasts of variables
In terms of the link between different ‘ease of doing
business’ variables and the proportion of GDP accounted
for by investment, we again found links between various
features of the insolvency regime and this measure of
economic success. All ‘ease of business’ indicators were
not as strongly correlated with investment as a share of
GDP as they were with GDP per capita. However, the
‘recovery rate’ – the amount recovered when a business
is closed – had a stronger correlation with investment as a
share of GDP than any other factor examined.
The index that had the second strongest correlation with
investment as a share of GDP was the overall ease of
doing business indicator, with a correlation of -0.51. The
time to close a business had a relatively low correlation
at -0.23. The cost of closing a business was only weakly
related to investment as a share of GDP, with a correlation
of -0.18. This indicates that the relevant factor from an
investment point of view is the recovery rate rather than
cost and time of closing a business. Nevertheless, these
factors are related to each other and it would be dif?cult to
?ourish in one area and be inadequate in others.
We also analysed the impact of the insolvency regime on
economic growth.
To calculate the relationship between economic growth
and the insolvency industry we looked at GDP growth rates
in OECD countries. We took only the countries which had
GDP per capita over $20,000. We used the average rate of
growth of gross domestic product since 2000, up to where
we had data available, which was either 2005 or 2006.
Using the same method as above, we calculated the
correlation between the OECD countries and the World
Bank ease of doing business indicators. The recovery
rate has a correlation of +0.46 with average annual GDP
growth. ‘Time to close a business’ has a correlation
coef?cient of -0.39. The overall ease of business index has
a correlation of -0.34.
The value of the insolvency industry
68
within an acceptable degree of accuracy. Nevertheless, we
use several scenarios in order to assess the likely affect on
company insolvencies.
We now investigate the reliability of the model. The p-value
of the explanatory variables is less than 0.05, indicating they
are accurate within the 95 per cent con?dence level and
suggesting the model is robust:
The p-value for •
was 0.001
the p-value for • was 0.002.
There are other ways to assess the accuracy of the model.
The r-squared is often used a measure the model’s accuracy
– with a value of one indicating that the explanatory variables
explain 100 per cent of the dependent variables variance. A
value of zero indicates that the explanatory variables cannot
explain any of the changes in the dependent variable. The
r-squared of our corporate insolvencies model is 0.6044,
which indicates 60.4 per cent of the variation in the model
can be accounted for by the changes in the independent
variables.
Turning to individual insolvencies, the model used for
predicting individual insolvencies was:
Where:
market = a variable used to estimate the effect of the •
change in environment to individual insolvencies
all other terms as de?ned previously •
The market variable was used to assess the effect of the
change in market conditions on personal insolvency. The
market variable represented the change in demand and
supply conditions resulting from an increase in awareness
of individual voluntary arrangements and the subsequent
action of creditors of restricting their supply. It took the value
until 2001. From 2002 a time trend was used, with the value
one in 2002 up to ?ve in 2006.
We used the ‘general to speci?c approach’ to decide on
the most appropriate variables to put into our model. This
approach starts with a high number of variables in the
model and removes the least signi?cant variables, one
by one, until a satisfactory model is obtained. There is a
trade-off when deciding the most appropriate number
of explanatory variables to include in a model. As the
number of explanatory variables increases, the ability
to explain ?uctuations within the dependent variable
also increases. However, the chance of ?nding spurious
relationships between variables also increases. When
forecasting, there is a further concern with each additional
explanatory variable that is added to the model. Each
of the explanatory variables needs to be predicted and
inaccuracies in predicting the variables will affect the
model’s reliability. We therefore removed insigni?cant
variables from our regressions until only the most
signi?cant variables remained.
The model used for predicting corporate insolvencies was:
Where:
• = the intercept
•
= Gross Domestic Product, annual percentage
change, one year prior to t
• = error term
all other terms as de?ned previously •
Our model for corporate insolvencies used seventeen
periods of observation, for the years 1989 to 2006.
Gross domestic product was chosen as the main
explanatory variable. Since gross domestic product
encapsulates changes in the macroeconomy it includes
the main factors that will affect businesses. It takes time
for changes in the economy to result in a business failure.
Therefore GDP growth is lagged by one year in our model.
As we have forecast GDP growth
102
on a quarterly basis
since 1993, values for the forecast period can be assumed
102 Our forecasts are published by the treasury
The value of the insolvency industry
69
Figure 42 Number of business failures, actual
and predicted, thousand (RHS), England and
Wales, and Gross domestic product growth,
United Kingdom, 2000-2012
Source: Insolvency Service, Of?ce of National Statistics and cebr
forecasts, 2007
We now investigate the reliability of the model. The p-value
of the explanatory variables is less than 0.09, indicating
that they are accurate within the 90 per cent con?dence
level and suggesting the model is relatively robust:
The p-value for •
was 0.087
the p-value for market was 0.002 •
the p-value for • was 0.06.
The r-squared of our personal
insolvencies model is 0.7193, which
indicates that 71.9 per cent of the
variation in the model can be accounted
for by the changes in the independent
variables.
Now we have determined the
robustness of the models we can use
them to forecast insolvencies.
We use the past relationship of
the explanatory variables with the
dependent variable. Then, by predicting
their future changes in the explanatory
variables, we determine the likely future
impact of the dependent variable. We
de?ne a set of scenarios in chapter
5. The results from the econometric
regression were analysed against interviews and survey
responses to verify and corroborate ?ndings.
In Figure 42 we present our base forecasts of company
insolvencies. This ?gure also contains the standard errors
of our forecasts.
0
5
10
15
20
25
30
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Total company failures
Base estimates for business failures
Lower standard error bar
Upper standard error bar
The value of the insolvency industry
70
Mike Norris; Director of Policy Development, Review and •
International Issues at The Insolvency Service
Phillip Sykes; Member of the Joint Insolvency Committee, •
The Institute of Chartered Accountants in England and Wales
Andrew Tate; Member of the Joint Insolvency Committee, •
The Association of Chartered Certi?ed Accountants
Jeremy Willmont; Partner, Moore Stephens •
In Figure 43 we present our base forecasts of individual
insolvencies. This ?gure also contains the standard errors
of our forecasts.
Figure 43 Number of business failures, actual
and predicted, thousand (RHS), England and
Wales, and Gross domestic product growth,
United Kingdom, 2000-2012
Source: Insolvency Service, Of?ce of National Statistics and cebr
forecasts, 2007
6.7 Expert interviews
In this section we outline the insolvency industry experts
that we interviewed to gain additional insight of the
insolvency industry.
We interviewed seven insolvency industry specialists:
Anne Bryce; Director of insolvency, Institute of Chartered •
Accountants Scotland
Chris Garwood; Partner Carrick Reed insolvency, •
representative of the Solicitors Regulation Authority on
the Joint Insolvency Committee
Geoffrey Fitchew; Chairman, Insolvency Practices •
Council
0
20
40
60
80
100
120
140
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
f
2
0
0
8
f
2
0
0
9
f
2
0
1
0
f
2
0
1
1
f
2
0
1
2
f
Total company failures
Base forecast of business failures
Lower standard error bar
Upper standard error bar
The value of the insolvency industry
71
Ellis, D (1998) ‘The Effect of Consumer Interest Rate
Deregulation on Credit Card Volumes, Charge-offs, and the
Personal Bankruptcy Rate’, Bank Trends 98 (05) Federal
Deposit Insurance Corporation
Fan, W., White, M.J. (2003) ‘Personal Bankruptcy and
the Level of Entrepreneurial Activity’, Journal of Law and
Economics 46, pp 543 – 568.
Fay, S; Hurst, E; White, M (1998) ‘The Bankruptcy Decision:
Does Stigma Matter?’ Department of Economics Working
Paper Series, Department of Economics, University of
Michigan
Friedman, M (1957) ‘A Theory of the Consumption
Function’, National Bureau of Economic Research
(Princeton, N.J., 1957)
Georgellis, Y., Wall, H.J. (2006) ‘Entrepreneurship and the
Policy Environment’, Federal Reserve Bank of St. Louis
Review 88(2), pp 95-111.
Greene, W (1991) Econometric Analysis MacMillan, New
York
Gropp, R; Scholz, J; White, M (1997) ‘Personal Bankruptcy
and Credit Supply and Demand’ The Quarterly Journal of
Economics 112 (1); 217-251
Gross, D; Souleles, N (2002) ‘An Empirical Analysis of
Personal Bankruptcy and Delinquency’ The Review of
Financial Studies 15 (1) 319-347
Hendry, D. F. (1995) Dynamic Econometrics. Oxford: Oxford
University Press.
Hendry, D. F., and Mizon, G. E. (1993) ‘Evaluating dynamic
econometric models by encompassing the VAR’ Phillips,
P. C. B.(ed.), Models, Methods and Applications
Holtz-Eakin, D., Joulfaian, D., Rosen H.S. (1994) ‘Sticking it
Out: Entrepreneurial Survival and Liquidity Constraints’, The
Journal of Political Economy 102:1, pp 53-75.
Japelli, T (1990) ‘Who is Constrained in the US Economy?’
Quarterly Journal of Economics 104 219-34
Kocherlakota, N (1996) ‘Implications of Ef?cient Risk Sharing
without Commitment’ Review of Economic Studies 63 (4):
595-609
Kowalewski, K (1997) ‘Personal Bankruptcy: Theory and
Evidence’ Economic Review Federal Reserve Bank Of
Cleveland
6.8 Bibliography
Acs, Z., Audretsch, D., Braunerhjelm, P., Carlsson, B.
(2005), ‘Growth and Entrepreneurship: An empirical
assessment’, Max Planck Institute of Economics, Group
Entrepreneurship, Growth and Public Policy.
Armour, J., Cumming, D. (2005) ‘Bankruptcy Law and
Entrepreneurship’, University of Cambridge Centre for
Business Research Working Paper No. 300.
Athreya, K (2004) ‘Shame as it ever was: Stigma and
Personal Bankruptcy’, Federal Reserve Bank of Richmond
Economic Quarterly Journal.
Audretsch, D.B., Keilbach, M., (2005) ‘Entrepreneurship
capital and regional growth’, Annals of Regional Science
39, pp 457–469.
Autio, E., Ho, Y.P., Wong, P.K., (2005) ‘Entrepreneurship,
Innovation an Economic Growth: Evidence from GEM
data’, Small Business Economics 24, pp 335–350
Berkowitz, J., White, M.J. (2004) ‘Bankruptcy and small
?rms’ access to credit’, The RAND Journal of Economics
35:1, pp. 69-84.
Bosma, N., De Wit, G., Van Praag, M. (2004), ‘Initial Capital
Constraints hinder Entrepreneurial Venture Performance’,
Tinbergen Institute Discussion Paper.
Buckley and Brinig (1995) ‘The Bankruptcy Puzzle’
Working Paper George Mason University School of Law
Carree, M., Thurik, R., Van Stel, A., (2005) ‘The Effect of
Entrepreneurial Activity on National Economic Growth’,
Small Business Economics 24, pp 311–321.
Davidson, J. E. H., Hendry, D. F., Srba, F., and Yeo, J. S.
(1978). ‘Econometric modelling of the aggregate time-
series relationship between consumers’ expenditure and
income in the United Kingdom’ Economic Journal, 88,
661--692.
Dubey, O, Geanakolaplos, J and Shubik, M (2005) ‘Default
and Punishment in General Equilibrium’ Econometrica 73
(1):1-38
Edelburg, W (2003) ‘Risk Based Pricing of Interest Rates in
Household Loan Markets’ Federal Reserve Board Working
Paper 2003-62
The value of the insolvency industry
72
Yeager, F (1994) ‘Personal Bankruptcy and Economic
Stability’ Southern Economic Journal 41
Zame, W (1993) ‘Ef?ciency and the Role of Default when
Security Markets are Incomplete’ American Economic
Review 83 (5) 1142-64
6.9 Membership survey
A copy of the survey we sent to the members of R3 is
contained as a separate document.
Lawrence, E (1995) ‘Consumer Default and the Life Cycle
Model’ Journal of Money, Credit and Banking 27 (4):
939-954
Mizon, G. E. (1995) ‘A simple message for autocorrelation
correctors: Don’t’ Journal of Econometrics, 69, 267--288.
Mizon, G., and Richard, J. (1986) ‘The encompassing
principle and its application to non-nested hypothesis
tests’ Econometrica, 54, 657--678.
Peterson, R and Aoki, K (1984) ‘Bankruptcy Filings
Before and After the Bankruptcy Reform Act’ Journal of
Economics and Business 36
Repetto, A (1998) ‘Personal Bankruptcies and Individual
Wealth Accumulation’, Working Paper, Universidad de
Chile
Runkle, D (1991) ‘Liquidity Constraints and the Permanent
Income Hypothesis: Evidence from Panel Data’ Journal of
Monetary Economics 71-87
Salgado-Banda, H. (2005) ‘Entrepreneurship and
Economic Growth: An Empirical Analysis’ Dirección de
Estudios Económicos Dirección, General de Investigación
Económica, Banco de México.
Sheirs, A and Williamson, P (1987) ‘Nonbusiness
Bankruptcies and the Law: Some Empirical Results’
Journal of Consumer Affairs 21 (2)
Shephard, L (1984) ‘Personal Failures and Bankruptcy
Reform Act of 1978’ Journal of Law and Economics 27
(2):419-37
Simmons, P (1989) ‘Bad Luck and Fixed Costs in Personal
Bankruptcies’ The Economic Journal 99 (394): 92-107
Visa USA Inc (1996) ‘Consumer Bankruptcy: Causes and
Implications’, San Fransisco: Visa USA Inc July 1996
White, M (1997) ‘Why Don’t More Households File for
Bankruptcy?’ Journal of Law, Economics and Organization
14 (2)
White, M.J. (2005) ‘Personal Bankruptcy: Insurance, Work
Effort, Opportunism and the Ef?ciency of the ‘Fresh Start’’,
Working Paper University of California, San Diego, and
National Bureau of Economic Research
Woodward, W and Woodward, S (1983) ‘Exemptions as
an Incentive to Voluntary Bankruptcy: An Empirical Study’
Commercial Law Journal
doc_477747798.pdf