Insolvencies set to rise despite drop, reports predict
A RISE in corporate insolvencies is being predicted in the first half of 2010 with business failures occurring at an earlier stage of deterioration than in previous recessions.
According to Begbies Traynor’s latest Red Flag Alert, which monitors early warning signs of company distress, more than 140,000 companies experienced significant and critical financial problems in the last quarter of 2009 – 6% higher than in the previous quarters but 14% lower than the same period 2008.
The North East and Yorkshire saw a 1% quarter-on-quarter drop while firms experiencing difficulties in quarter four 2008 compared to the same quarter 2009 fell by 10% to 12,253.
Despite the improvement, the business rescue, recovery and restructuring specialist said that a new trend was emerging, which indicated that a higher number of business failures were occurring at an earlier stage of deterioration than in previous recessions.
It said that fiscal stimuli such as HM Revenue & Customs (HMRC) much needed Business Payment Support Service, through which more than £4.2bn in deferred tax liabilities had been agreed, had helped boost the economy.
However, it warned that HMRC remained one of the principal creditors in many insolvencies and it fears that when the current ‘time-to-pay’ scheme is finished there will be a significant rise in company failures – most probably from quarter three 2010 onwards.
Ric Traynor, executive chairman of Begbies Traynor Group, said: “Government support measures are providing welcome relief to the UK’s struggling companies in the short term but they may exacerbate problems for some businesses as the need to repay debt catches up with them later in the year.
“Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies have lagged behind technical recession by 1 to 2 years. With tax and interest rates certain to rise, as well as increasing pressure on consumer spending, there is every reason to suggest that the insolvency peaks of this recession remain some way off.
“While business finance is expected to become more readily available during the first half of 2010, we anticipate a rise in the levels of financial distress during the second half of 2010, as temporary financial support measures are unwound.”
Meanwhile, research by business advisory firm Deloitte showed that the total number of companies falling into administration in 2009 saw a marginal drop of 2% from 3,245 in 2008 down to 3,188.
The last quarter of 2009 saw a drop of 18% on the previous quarter, with a total of 599 companies falling into administration compared with 733 in quarter three last year.
Quarter on quarter there was a dramatic drop of 41% with 1008 companies falling into administration in the fourth quarter 2008.
Ian Brown, reorganisation services partner at Deloitte in Leeds, said: “We saw a sharp rise in the number of administrations at the end of 2008 and the beginning of 2009, which reflected the peak of the recession.
“As the year progressed we saw lenders become more versatile, increasingly adopting solutions such as debt for equity swaps and covenant resets with companies aggressively attacking costs and improving cash management, including undertaking CVAs.
He added: “This has enabled many businesses to weather the economic storm, but the question remains for how long?”
