Record number of retail insolvencies in first quarter of 2019

Fears over the continuing crisis of high street stores in Scotland is evident after the retail sector experienced a record number of failures in the first quarter of the year.

New research from the Insolvency Service found 28 Scottish retailers filed for insolvency in the first three months of 2019. Having collated data since 2007, this is the highest figure recorded, with the third quarter of 2012 previously being the worst number of retailers going bust at 27.

While shop owners are facing the soaring costs in business rates, wages and utilities, customers are being drawn away from adding to retailers’ footfall and towards the endless shopping services now available online.

A survey by Local Data Company (LD) revealed 265 stores were closed in 2018 across eight Scottish towns and cities: Aberdeen, Ayr, Dundee, Edinburgh, Glasgow, Falkirk, Paisley and Perth. With only 146 stores opening in the same period, this was a net change of minus 119 on the high street.

With high street retailers struggling to compete with online shopping, several retailers are turning to company voluntary arrangements (CVAs) to scale back their physical presence and minimise rent bills.

At the end of April, the UK’s biggest department store chain Debenhams announced its plans to close 22 stores – one of which is located in Scotland – putting 1,200 jobs at risk. Debenhams was put through a pre-pack administration that wiped out the investment of shareholders, including Mike Ashely, the founder of Sports Direct.

For the 26 weeks to March, sales in the Debenhams stores fell 7.4 per cent. Its new owners, who are a consortium of banks and hedge funds, launched the major store-closure programme via a CVA. The CVA will allow them to renegotiate rents at the remaining stores across the UK. It has been said that 39 stores will stick to their current rental rates for the duration of their leases while the company aims to secure rental reductions of between 25 and 50 per cent for the remaining stores.

The announcement from Debenhams is just the tip of the iceberg. Last year saw House of Fraser closing stores after being bought out of administration, while Marks and Spencer is currently in the process of shutting 100 stores by next year.

The number of vacant retail units in Scotland is higher than the UK average, with recent economic figures suggesting consumer spending has slowed over the past two years. Named brands such as Carpetright, Homebase and New Look opted for CVAs, while companies like Fabb Sofas, Maplin and Toys R Us ended up in administration.

However, according to recent research from Savills, the number of empty retail units that were let out in Scotland last year was 82; eight per cent up on the long-term average. These vacant units were snatched up by chains such as Aldi and Lidl, with Homestore & More securing stores at Craigleith Retail Park in Edinburgh and Mavor Avenue in East Kilbride.

Mike Spens, Director of the out-of-town retail team at Savills in Scotland, concluded:

“Corporate failures in the retail sector in the last 12-18 months have released space onto the out of town retail market and allowed for a greater churn. This has created an opportunity for brands such as Home Bargains and the discount food retailers to expand across Scotland and for new entrants to secure representation.”

Despite this, accountancy firm, French Duncan, believe the pressures on the retail sector could result in 2019 being a record year for retail insolvencies in Scotland.

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330,000 Scottish children live in households that are financially struggling

Official figures indicate that more than 300,000 children in Scotland are living in families who do not have access to emergency costs of up to £500.

The lack of financial flexibility among families has been flagged as a real concern as many Scots could be left in serious financial trouble if they are stuck with an unexpected household expense such as a broken boiler or having to replace a refrigerator.

Elaine Smith, MSP, referred to the current problem as putting Scottish families just “one big unexpected bill away from being in real financial trouble”.

Ms Smith explained:

“Replacing something like a fridge or boiler is expensive, but thousands of families with children would need to turn to debt to do it, because the cost of living, precarious work and stagnant wages aren’t letting people save for a rainy day.”

A recent YouGov survey of more than 2,000 Scots found that almost half (47 per cent) of Scottish workers run out of money before pay-day while 26 per cent have missed at least one council tax payment in the last year. Other issues were discovered during the survey, such as:

  • 30% would like to put away at least £20 per month for a ‘rainy day,’ but can’t afford to.
  • 28% can’t afford to keep their homes decorated in a decent condition.
  • 25% find it difficult or very difficult to cope with their current income.
  • 25% would like to save for a pension on a regular basis but can’t afford to.
  • 23% would like to have the recommended levels of dental treatment but can’t afford to.

The issue of poverty and financial insecurity in Scotland was also evident from debt help charity StepChange’s ‘Scotland in the Red’ report, claiming that nearly 700,000 Scots are either in, or at serious risk of falling into, problem debt.

The head of StepChange debt charity in Scotland, Sharon Bell, said she was "increasingly alarmed by the increases in the proportion of our clients who are struggling with household bills, particularly council tax".

With the average amount of council tax arrears amounting to £2,017, Ms Bell believes that “clients in Scotland are significantly more likely to have council tax arrears compared to elsewhere in the UK.”

The report found that nearly one in five were behind on their electricity bill; up four per cent on the previous year, while the amount they owed had increased by 10 per cent in just 12 months to an average of £826.

Stepchange found the most common reasons for debt were:

  • Reduced income (17 per cent)
  • Unemployment or redundancy (17 per cent)
  • Injury of illness (16 per cent)
  • Lack of budgeting (11 per cent)
  • Separation or divorce (10 per cent)

The most common age who reached out for debt advice was the 25-39-year-old age group (51 per cent). This was followed by those aged between 40 and 59 at 30 per cent, under 25s at 14 per cent, and over 60s at five per cent.

Couples with children accounted for 26 per cent of the people who contacted the charity in 2018. Despite single parents only representing six per cent of the entire UK population, the study found an increasing number of single parents are looking for debt help; rising from 18 per cent in 2014 to 23 per cent in 2018.

Douglas Hamilton, of the Poverty and Inequality Commission, believes the Scottish government needs to take meaningful action and must address the problem by “making full use of their powers to reduce housing costs, improve earnings and enhance social security.”

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Brits refuse to cut holidays in order to save money

Economic uncertainty caused by Brexit has encouraged Brits to seek better deals on insurance while reducing their spending on luxuries such as takeaways and shopping. However, recent research has found that the public refuse to sacrifice their trips abroad to improve their financial circumstances.

Since the 2016 Brexit referendum, consumer confidence has steadily fallen. Currently, 61 per cent of the public expects the UK economy to worsen over the next 12 months, and 41 per cent expect their personal financial situation to take a hit.

According to a recent YouGov poll, a third of Brits are concerned about the increasing costs of food and groceries and around one fifth (21 per cent) are worried that they do not have sufficient savings in case of an emergency.

To alleviate some of these Brexit-related worries, more than two-thirds (67 per cent) have said they plan to, or already have started, saving money. Of these respondents, three in five (61 per cent) say there is no particular reason for saving other than they want to be prepared for whatever comes.

Cutting expenses seems to be a high priority for several Brits. Around a third of those with a mortgage are reviewing their current rate (34 per cent) and more than a quarter (26 per cent) of insurance policyholders are looking to get cheaper deals on their critical illness cover, income protection and life insurance.

Additionally, the public has placed luxuries high up on their list of ways to cut costs. Takeaways are likely to take the biggest hit, with the most significant difference of minus 25 between those who say they will spend more and those who say they will spend less in the coming year. Coffee and snacks out are the next luxury most likely to go, with a gap of -18.

This was closely followed by having a gym membership (-14), and going to the cinema (-13). Consumers plan to spend less in the food and drinks industry as well, with ‘going out for drinks’ showing a gap of -12, and ‘eating out’ at -9.

However, the most expensive luxury on the poll - travelling abroad - looks to be the least affected. Despite many believing that holidays (66 per cent) and airfares (65 per cent) will be more costly following Brexit, only 24 per cent are actively planning to cut down on their travel spend in the next 12 months. In fact, two in five (40 per cent) have said they will definitely take a trip abroad in 2019.

Similar findings came from the leading association of travel, ABTA, when they discovered Brits would rather reduce their spending on eating out than cut back on their holidays (25 per cent vs 13 per cent). The most common items that people would consider cutting back on in order to save money was alcohol, cigarettes and takeaway meals.

Of the age groups surveyed, 18-24-year olds were the most committed to their holidays, with only six per cent saying they would reduce the number of trips they had to save money. This is despite the age group often being regarded as having the least disposable income.

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Extensive links between debt and suicide revealed

New research from the Money and Mental Health Policy Institute (MMHPI) has shown extensive connections between problem and suicidal thoughts and attempts, leading the organisation to call upon the government to change the law to provide better protection for debtors’ health, among other recommendations.

Report reveals link between financial problems and mental health issues

The recent survey was based on data gathered from both the Adult Psychiatric Morbidity Survey and a survey of those with personal and professional experience of suicide issues.

The report by the MMHPI revealed that nearly a quarter of people (23%) who attempted suicide in the past year were in problem debt.

What is problem debt?

People are defined as being in 'problem debt' when they are "seriously behind on payments for bills or credit agreements or have been disconnected by a utilities provider in the past year".

The pressures of financial problems were exemplified by the case of Jerome Rogers, the 20-year-old who took his own life last year after feeling too pressurised by debts arising from parking fines.

13% of people in problem debt - around 420,000 people - consider ending their lives every year. Of the 420,000 people, 100,000 attempt suicide every year. This means that people in problem debt are three times more likely to have considered suicide than those who are in a more financially stable state.

The MMHPI says that those in persistent poverty and financial insecurity are at higher risk of becoming suicidal, and that sudden triggers - such as threatening letters from creditors or rapid accumulation of fees - might push someone to become suicidal.

Recommendations made by the MMHPI

The MMHPI has made several recommendations in order to help break the connection between problem debt and suicide. In particular, it recommends that the government should review rules relating to how creditors word their letters in order to make them more supportive and comprehensive, and less aggressive.

The MMHPI also recommends that Public Health England improves its guidance to local authorities about the importance of financial difficulty as a potential trigger for mental health problems.

Essential service providers should offer suicide prevention training to their staff, the MMHPI further recommends.

Reactions to the report

Speaking to the Guardian, Vicki Nash, the head of policy and campaigns for the mental health charity Mind, explained:

“Mind [has] found that half of people with mental health problems have thought about or attempted suicide as a result of social issues such as housing issues, debt, benefit support, and employment.”

Nash also highlighted the importance of realising that there were real people behind the statistics - including parents, colleagues, and friends.

While the government has not announced any new Bills to implement the report’s recommendations, a spokesperson did tell the Guardian that “suicide is the most devastating outcome for people struggling with the challenges of life and we are committed to helping people in problem debt receive the proper support.”

The full survey can be read here.

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Is the Debt Arrangement Scheme still relevant?

It could be argued that the Scottish Government’s Debt Arrangement Scheme (DAS) has had its day.

Introduced in 2004, it has gone through many updates and changes over the years. With the introduction of a dedicated Business DAS in 2015, partnerships, trusts or an unincorporated body of persons can now also benefit from repaying debts over a number of years, the freezing of interest and charges and protection of assets.

However, even with those excellent features, the use of DAS as a problem debt management tool has dropped since it’s height in 2012/13.

We keep hearing in the news that there is a ‘Growing personal debt mountain!’, ‘The next crash is just around the corner!’ or about ‘Britain’s growing debt problem!’. If that’s the case what then are people doing to deal with their problem debt?

Some may use a formal insolvency option such as Sequestration (Bankruptcy) or a Trust Deed. If they have no assets this may be the best solution for them.

However If they have equity in property, or want to protect their assets, they may consolidate debts into their mortgage; with such current low interest rates this makes some sense. But, long term it’s really just accumulating more debt and if mortgage rates go up again, how long will it be before people find they are having difficulty trying to find that extra amount each month to cover the additional costs?

It’s been suggested that PPI claims may be a factor and people are using the money they get from these to clear or pay towards debts.

Another factor could be the use of Debt Management Plans (DMPs). These work in a similar way to a DAS, allowing people to repay debts over a number of years and freezing interest and charges with the creditors’ agreement. The criteria to enter one is less stringent than a DAS, however they don’t offer that guaranteed level of protection which comes with the Scottish Government backed Debt Arrangement Scheme. Creditors agreeing to a DMP can still take further action if they wish to do so or refuse to freeze interest and charges.

As the DAS is not yet available in England, DMP’s are still widely in use there.

So overall, is DAS less relevant today than it was a few years ago? In short I believe the answer is ‘No’. If anything, it’s more relevant.

As a tool for helping people and businesses repay problem debt, it’s not perfect, but the benefits would seem to far out way the detriments.

From the moment proposals are sent to creditors, interest, charges and fees are frozen and assets are protected. As long as debtors stick to the monthly payments creditors can’t take further action against them. If your circumstance s change and you can no longer meet your payments, the DAS can be varied or a payment break lasting up to six months applied for. If creditors object to the initial proposal the decision on whether or not to allow the DAS or BDAS to proceed is taken by the Accountant in Bankruptcy under the fair and reasonable test. Furthermore, it’s all backed in statute by the Scottish Government so creditors can’t suddenly change their minds and it’s not classed as formal insolvency but a voluntary arrangement with your creditors.

So, if you are having issues with problem debt, don’t bury your head in the sand or hope that it will go away. Seek some advice. Either contact mlm solutions, for a free debt options review, where a continuing money adviser will be able to advise you on the most suitable course of action for your circumstances or, speak to your local Citizens Advice Bureau, Step Change or other free sector debt advice organisation.

Problem debt, in a bind, we’ll help you find some peace of mind!


Report Reveals Fall in Scottish Corporate Insolvency Numbers

There has been a fall of 3.8% in the number of corporate insolvencies in Scotland in the third quarter of 2017/18, according to the latest figures from Scotland’s Accountant in Bankruptcy (AiB).

The figures show that total corporate insolvencies dropped from 210 to 202 compared to the same quarter a year ago. The figure for Q3 of 2017-18 is made up of 124 compulsory liquidations and 78 creditor voluntary liquidations. No receiverships were recorded for the fifth quarter in succession. There were also 129 members' voluntary liquidations, which is down from the 152 recorded in the same quarter for 2016-17.

The insolvency and restructuring trade body R3 has commented on the latest figures.

“In all, over 2017, the AiB recorded 15% fewer liquidations compared with 2016 (782 in 2017 against 920 in 2016),” said Tim Cooper, Chair of R3 in Scotland. “While 2017 may not go down as a banner year for the Scottish business community, the decrease in liquidations gives some reassurance that the economy is still ticking over. The AiB does not record business rescues – that is, administrations or Company Voluntary Arrangements – so this is an incomplete picture. It’s important to remember that insolvency isn’t necessarily the end of the road, and plenty of businesses entering an insolvency procedure will be rescued.”

“You could forgive Scottish firms – along with their peers across the UK – from feeling that the corporate landscape is getting trickier to negotiate,” he added. “Companies looking to put themselves on a firm footing for 2018 and beyond should consider speaking to a licensed and professional business advisor, making sure to check their credentials.”

Contact our Specialist Insolvency Advisers

At MLM Solutions we understand that facing up to financial challenges can be extremely difficult and stressful. However, you should be reassured to know that there are options available and, with the right advice and support, you can take the necessary steps to improve your situation. Contact us today to find out more about how we can help you.