Business failures fall but UK warned to brace for a ‘deluge’ in 2010

THE number of companies heading for failure has fallen across the region, but the figures are just the calm before the storm.

According to the latest Begbies Traynor Red Flag Alert the number of companies with significant and critical financial problems has fallen in absolute terms both year-on-year and quarter-on-quarter.

The business rescue, recovery and restructuring specialist said that the numbers mostly reflected the impact of HM Revenue & Customs Business Payment Support Service, which has seen more than 215,000 firms defer payment worth nearly £4bn in tax liabilities.

In Yorkshire and the North East the number of firms with significant problems fell by 6% in quarter three compared to the same quarter 2008 to 12,135.

Quarter-on-quarter the fall was 12% from 13,859 to 12,135.

The number of firms with critical problems also dropped year-on-year from 463 to 394 – a fall of 15%. Likewise there was a quarterly drop of 27% from 537 to 394.

Begbies Traynor said that the falls in quarter three were to some extent “symptomatic” of increasing credit availability and growing business confidence.

It said the easing of corporate stress was reflected in the ICAEW’s latest Business Confidence Monitor, in which the Confidence Index rose from -45.3 in quarter one to +4.8 in quarter three – a level not seen since the third quarter 2007.

However, the firm warned to expect a “deluge of business failures” in 2010 with evidence mounting that the economy is at the mid-point of a ‘W’ shaped recession.

It said statistics from recessions over the past 40 years confirmed that insolvencies peak between one and two years after GDP stops shrinking.

Scarce credit after this recession may intensify this effect causing a substantial rise in insolvencies during 2010 and into 2011.

Sectors most impacted by adverse actions in quarter three were engineering and recruitment with critical actions up 31% and 12% respectively on last year.

The recruitment sector is a victim of rising unemployment, which typically continues and peaks well after the end of GDP shrinkage.

Ric Traynor, executive chairman of Begbies Traynor Group, said: “The third quarter Red Flag Alert statistics demonstrate that the UK may be in the eye of the storm.

“The well-intentioned government efforts to prop up struggling companies may provide a necessary lifeline in the short-term, but will ultimately prove futile in many cases.

“Both banks and trade creditors are also holding off wherever possible in the hope that business fortunes may improve, but Begbies Traynor supports the view of many leading economists that the UK is currently at the midpoint of a ‘W’ shaped recession.”

Mr Traynor said that despite the recent UK stock market rally, private equity groups remained on the sidelines with recently reported UK deals in the third quarter being at their lowest level for 25 years – a clear indication in his opinion that they believe that the worst is yet to come.

“There is every reason to suggest that the unemployment and insolvency peaks of this recession remain some way off,” he continued.

“Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies are lagging indicators, and thus seem certain to rise in 2010.”