A year has passed since the end of the recession; with an expected lag between a recessionary and subsequent insolvency peak of 12-18 months, many predicted that 2010 would see a large rise in corporate insolvencies. Instead, comparing Q2 2009 and 2010, we have seen a 19% fall in liquidations and 24% in administrations. So with the economy on the mend, has a crisis been averted?

Unfortunately the economic recovery is fragile; retail spending is falling and, according to figures released by Halifax, house prices crashed in September by 3.6% – the largest monthly fall since 1983. Mortgage approvals are at decade-low levels and are accompanied by the exhortations of Vince Cable for the banks to start lending again.

It was anticipated that hedge funds, pension funds and sovereign wealth funds would step into the gap in corporate funding currently being left by the banks. To date, there has been little evidence of this; instead the greatest area of expansion has been in the high-yield bond market. Access to this market is, however, limited; as a result, SME businesses seeking funding may turn to that offered by factors, invoice discounters and other asset-based lenders. Both these alternative sources of funding share a common characteristic, namely the provision of funding is likely to be at a higher cost.

With the tougher regulatory regime and capital adequacy demands, bank lending is unlikely to return to normality until balance sheets are much improved. It is against this background that, rather than seeking recovery and flooding the market with distressed assets, as occurred in the 1990s, banks are pursing alternative options to ensure that bad debt is not crystallised. Where ‘forced’ this may include moving assets into subsidiary SPVs, funding purchasers of distressed assets to the extent of the existing bank debt, or agreeing to ‘amend and extend’ facilities.

Where lenders are willing to amend and extend facilities, albeit at the cost of increased spreads, additional fees and improved security, many businesses are thus currently able to avoid issues of over-gearing. Allied to this it should be noted that over 300,000 businesses have entered into time-to-pay arrangements with HMRC (delaying payment of £5.2bn in tax).

So it appears at least for the short term that banks are not acting against corporate debtors, and businesses are able to avoid dealing with their debt burden. There is, however, concern within the insolvency profession that this ‘Mexican stand-off’ has meant a delay in actioning vital financial and/or operational reconstruction. Left too late, reconstruction options become less available and insolvency more inevitable.

Also on the horizon are £81bn worth of cuts in public spending resulting in over 490,000 jobs losses by 2014. Those companies dependent on public sector contracts will undoubtedly suffer and a domino effect could endanger the growth required from the private sector if a double-dip recession is to be avoided.

It is perhaps unsurprising that business confidence is low, resulting in a paucity of new investors willing to fund or buy businesses. The thought of ‘why buy now when the price could be lower later’, causes deflationary pressures, which in turn means that lenders and other stakeholders have little desire to expose distressed assets to an already depressed market.

As a result, despite signs of economic recovery, there are clearly huge problems still remaining. These problems have not been solved, merely postponed. Clearly the government will hope that an improving economy will enable both businesses and households to pay off its accumulated debt. If businesses are unable to do so, will this inevitably result in rising rates of corporate insolvencies? History would say yes, but to date the unique conditions created by the credit crunch and consequent global banking crisis have challenged such orthodoxy. One thing, however, is certain; we are not out of the woods yet.

Vernon Dennis is a partner and head of the corporate recovery and reconstruction department at Howard Kennedy