Boom time for insolvency firms

Insolvency practitioners are warning that their business is booming, signalling that more firms are falling into difficulties as the pace of economic growth slows.

The evidence of a sharp increase in the number of company failures last month is likely to increase the Chancellor's determination not to raise base rates after his meeting with the Governor of the Bank of England on Wednesday.

At their last meeting in May, Kenneth Clarke surprised markets by apparently rejecting Eddie George's advice for a half a percentage point rate increase.

Although a mixed batch of data since then has provided ammunition for both men's positions, the case against higher rates appears even stronger this month than last time.

Neil Cooper, senior corporate recovery partner at the accountancy firm Robson Rhodes, said his firm was far busier than three months ago, and there had been a significant increase in appointments to troubled companies during the past month. The firm is now considering increasing the number of people it has working on insolvency matters.

''The rise in the number of appointments in the past month is not a blip,'' Mr Cooper said. The type of failures he was seeing now were not those typical of an economic recovery, when firms tend to overtrade and run short of working capital. ''We are getting the types of failure associated with a shortage of business,'' he said.

At the last meeting, Mr Clarke argued that economic growth was slowing to a more sustainable rate, due to higher taxes and earlier interest rate increases. Since that decision not to raise rates, GDP growth in the first quarter has been revised slightly downwards, while new data has provided confirmation of the weakness in consumer spending and the persistent fragility of the housing market. Last week's weak US unemployment figures could also be interpreted as a harbinger of a more benign international interest rate environment.

Ralph Preece, Touche Ross's partner in charge of corporate recovery, said: ''There is certainly a lack of confidence,'' although he added that there was some volatility in the figures.

Recent figures from Touche Ross showed a 42 per cent rise in administrative receiverships and administration orderslast month. Although the figures are not seasonally adjusted, it was the first increase between April and May since 1990.

Mr Preece suggested that the rise in the number of insolvencies indicated that fear of recession was greater than the threat of inflation. Tim Hayward, head of corporate recovery at KPMG, agreed that the number of appointments was much higher than in the second half of last year. ''Last year we went through a period of an abnormally low level of insolvencies,'' he said.

Mr Hayward said much of the rise had affected retailing, whereas the number of manufacturing receiverships had fallen as a proportion of the total. Touche Ross's figures showed that the number of receiverships in manufacturing had fallen 15 per cent in May. Insolvencies had increased more in the North than the South. However, Mr Hayward does not expect further significant increases in the rate of insolvencies. ''We already have no feel-good factor, and people are not spending. I don't expect that to change,'' he said.

Although a significant indicator, the rise in insolvencies is unlikely to tip the balance in shifting the Bank away from its preference for another pre-emptive rate rise.

Gavyn Davies, page 29