Date Published: 29th October 2021
The latest red flag research for Q3 2021 from Begbies Traynor, which monitors the financial health of UK businesses has recorded 562,550 businesses in ‘significant financial distress1’, with a 139% uplift in CCJs2 in the past year.
However, the number of businesses in significant financial distress has fallen 14% since Q2 2021. This fall can most likely be attributed to rising corporate revenues as pent-up customer demand has fuelled a boom in consumption and allowed some companies to improve their short term debt position, whilst improving cashflow. Whilst this has eased the immediate threat to many companies’ survival, there is uncertainty if these trading patterns will continue.
Unfortunately, considerable challenges lay ahead for UK businesses, including constrained raw material availability, rising inflation, labour availability, spiralling energy prices and rising COVID rates, combined with a winding back of government COVID support measures that could yet impact failure rates in Q1 2022 and beyond.
CCJ’s are often a bellweather for future insolvency and the latest data paints a gloomy picture. Official data shows there were 9,101 CCJs lodged against companies during Q3 2020, rising to 21,769 during Q3 2021, a 139% uplift. This acceleration in CCJ’s was also evident between Q2 and Q3 2021 with a 51% increase.
The latest official figures show that court activity is picking up as creditors, become more aggressive in chasing debts.
This research from Begbies Traynor also found that despite the Q3 improvement in the financial performance of businesses, the numbers of significantly distressed companies is still 15% higher than pre-pandemic (488,934 – Q3 2019, 562,550 – Q3 2021).
There has also been a 17% rise in critically distressed businesses3 in the past quarter, with 1,431 – Q2 2021 and 1,668 - Q3 2021.
Top 10 Distressed Sectors*
*Number of companies exhibiting significant financial distress.
Distressed Companies by Region*
*Number of companies exhibiting significant financial distress. Table excludes 14,052 uncoded records.
Julie Palmer, Partner at Begbies Traynor, said:
“The UK economy - which remains one large recession short of its pre-COVID trajectory4 - is quickly recovering. However, it may prove to be transitory as rising CCJ figures are a cause for real concern.
“Despite the summer economic boom, systematic problems remain, and some businesses are encountering difficulties in paying back government COVID loans. However, Inflation, energy costs and labour availability are risk factors for many of these businesses, particularly if they are unable to pass these costs on to their customers.
“Whilst many businesses have returned to a sense of normality, history suggests that high levels of debts and subsequent overtrading could eventually take their toll on these businesses.”
Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:
“The fall in significant financial distress is welcome news and provides some breathing space for hard hit businesses, however I remain concerned that trading conditions will deteriorate for many companies as supply chain issues affect output and input costs continue their upward trajectory. These challenges combined with more aggressive creditor action, as evidenced by the rise in CCJ’s, demonstrate that companies are taking a tougher line to recover debts, as evidenced by the recent rise in insolvency levels.
More worrying has been the 44% rise in small business defaults for loans to corporations as published in the BOE’s latest credit conditions survey. This trend is backed up by our own empirical evidence. Every week as a business we have hundreds of conversations with distressed businesses and their advisers, and three clear trends are now emerging. Firstly, there is real concern amongst many SME directors about their ability to pay back Government backed bounce back loans with many directors exploring short to medium term insolvency options. Secondly many directors say that HMRC is taking an increasingly aggressive line in chasing debts, particularly those who have defaulted on time to pay arrangements and thirdly many businesses are coming under considerable pressure from landlords chasing debts.
“These risks combined with the withdrawal of government support measures and
protection will undoubtedly see an acceleration in insolvency rates into 2022.”
Ric qualified with Arthur Andersen in 1984 and founded Begbies Traynor in 1989. Ric specialises in practice management and has considerable experience in financial turnaround and dispute resolution within professional practices.