Accessibility Page Navigation
Style sheets must be enabled to view this page as it was intended.


How’s this for a truly remarkable statistic: the number of Scottish firms failing in the first quarter of 2013 tumbled by almost 63 per cent compared with the same quarter of last year.  

The latest Accountant in Bankruptcy (AiB) figures show that 143 Scottish companies went bust in the first thirteen weeks of this year compared to 385 in the first quarter of 2012.

The figures are the exact opposite of widespread expectation and pose a major puzzle for Scotland’s business sector.

Are the figures a fluke? Or do they indicate a genuine trend of underlying improvement in business conditions and business management?

With a glacial pace of economic recovery, continuing constraints on bank lending to small and medium sized businesses, household budgets under intensifying pressure and evidence of business failure and closure in every high  street in the land, every pundit and his dog had been predicting a continuing surge in business bankruptcies. 

And this was expected to even more marked after the growth in Scots business start-ups in 2010 and 2011 and the guffaw of the cynics that many if not most of these would come a cropper.

So why has the business failure rate done the opposite of what everyone expected?

The immediate reaction is that it has to be a statistical freak. A fall of this magnitude is just not credible. Indeed, this was the explanation instantly advanced by accountants and business advisers BDO barely had it penned the first sentence of its press release on the figures last week.  

“There are”, it rushed to explain, “some anomalies within the figures.” The major fall, it said, “is entirely down to compulsory liquidations which have reduced by 75.6 per cent on the same quarter in 2012.” The figure has not been as low as this was in Q4 2007 – before the recession had started.

Said Bryan Jackson, business restructuring partner with BDO, “These figures would, on the surface, indicate an improvement in the performance of the Scottish business community. The dramatically reduced numbers appear to show a more benign economic environment. If that is the case then this is to be welcomed. However, this may be more of a temporary blip than a full recovery.

“It is difficult to believe that businesses are operating in a more benign economic environment now than they were a year ago given the continued number of high profile failures.”

But there are problems with this explanation, for the BDO figures are no one-off aberration.

Earlier this year the credit reference agency Experian reported that the number of companies going bust across Scotland fell by half in January. The firm said there was a total of 41 Scottish business insolvencies during the month, down from 82 in January 2012 – the sharpest decline in failure rates across the UK as a whole.

Moreover, Experian said the fall in insolvencies continued the “steady downward trend” seen in Scotland last year, although it noted that January tends to be a “slow month” for business failures.

The Scottish failure rate, which equates to 0.03 per cent of the overall business population, was by far the lowest in the UK during January. It is half the UK rate of 0.06 per cent.

And across the UK overall,  the number of UK companies that collapsed during the month fell to 1,271, down from 1,376 a year ago and the lowest figure since June 2007.

Max Firth, managing director of Experian’s business information arm, said: “The figures for January show a marked decline in the insolvency rate, which in fact has hit its lowest level for over five years. This follows a relatively stable 2012, which itself was an improvement on the previous year.”

Most sectors saw a decline in business failures, although the numbers of IT and textiles companies going bust almost doubled, to 69 and 21 respectively, while there was also a big rise in the failure rate for property firms and utilities companies.

Despite tough conditions on the high street, which saw the likes of Blockbuster, HMV and Jessops slide into administration in January, the number of non-food retailers that collapsed during the month dropped to 81, down from 104 a year ago, but there was a slight rise among food retailers.

What makes these figures even more puzzling is that business failures typically tend to rise in the early stages of an economic recovery when companies find they do not have sufficient working capital to take advantage of an upturn in demand for products and services.

A depressing conclusion on this perspective is that we have not yet reached this point in the business cycle and that a torrent of failures still lies ahead.

What else might explain the decline? Says BDO’s Jackson:  “The reduced failure rate could be due to more realistic expectations and planning by business owners. As the recession has lasted so much longer than anyone expected we may be in a period when most Scots business owners are operating more effectively in relation to the current market conditions.

“I would hope”, he added, “ that these figures indicate a major shift for Scottish business but fear that they may be more to do with a temporary improvement rather than any major change in the economy.”

My own conclusions are these. First, there has to be an element of freakishness in a 63 per cent fall. Second, many failures, particularly in the micro sector, are not being captured by official data. Third, banks may be continuing a policy of forbearance on selected areas of their business lending, either through reluctance to crystallise loan write-downs and losses or fear of political backlash. And in any event I would need to see several quarters of falling business insolvency rates before being confident of drawing conclusions from such data.

Nevertheless, that a landslide of business failures has been avoided is no small plus point for business confidence generally. And if the trend is sustained in subsequent quarters it would also be of some encouragement to the venture capital industry.

Latest figures from the Association of Investment Companies show that the Venture Capital Trust (VCT) sector raised £402.5m in the 2012/13 tax year (value of new shares issued).  This is up 22 per cent on the previous tax year and the highest since 2005-06.

Ian Sayers, Director General, Association of Investment Companies (AIC) says the level of funds raised is at its highest in seven years, reflecting strong investor demand for the sector.

Might all this be light at last at the end of a very long dark tunnel? Let’s hope so.