Businesses braced for insolvency storm to hit home, as pandemic state aid and protection from creditors is shut off

Business Health Statistics Firm News

| January 28th 2022

More News by Ric Traynor

Date Published: 28th January 2022

Businesses braced for insolvency storm to hit home, as pandemic state aid and protection from creditors is shut off
  • 589,168 UK businesses reporting significant financial distress during final quarter of 2021, a 5%
    rise on the previous three months
  • 106% rise in County Court Judgments (CCJs) – a key early sign of future insolvencies as creditors
    are now actively using courts to recover debts
  • As Covid reliefs unwind, financially distressed companies brace for full force of debts to hit
  • Pressure ratcheting up almost across the board, with only one sector of the 22 covered by the
    “Red Flag Alert” (RFA) research showing an improved position
  • Situation even worse for companies already teetering on the brink of failure, with critical financial
    distress up 7% year‐on‐year in the final three months of 2021

Begbies Traynor’s “Red Flag Alert”, which has monitored the financial health of British companies for
the past 15 years, now paints a particularly worrying picture for UK businesses with increasing
numbers falling victim to pressures which have been building since coronavirus began piling up
problems in the economy almost two years ago.

The latest data indicates that the debt storm which has been brewing for years, but had been held off
by measures to provide breathing space for companies, could now be about to hit, sending
shockwaves through many industries.

Julie Palmer, partner at Begbies Traynor, said: “Businesses that have bravely battled through the
pandemic could now start to fail as the pressures they face become too much.

“Support from the Government such as furlough payments, tax reliefs and a moratorium on landlords
being able to evict businesses due to rent arrears cannot go on forever.

“Without these measures in place to protect them, a rising number of companies will have no other
option but to relinquish their business after two years of struggling on in the economic uncertainty that
has been tempered by measures to combat the impact of coronavirus.

“The lag effect of the economic fallout from Covid, plus significantly higher inflation, has created a
perfect economic storm for many companies, particularly the UK’s SME sector, which will undoubtedly
drive insolvency rates even higher.”

According to Ms Palmer, inflation is now the greatest threat to the economy with the true rate
potentially running far beyond the official 5.4% rate and possibly many multiples more than the Bank
of England’s target of 2%. Today, rising wage, energy and materials costs mean the CPI figures are
showing only part of the story in the UK and the subsequent impact on the public’s disposable income
is expected to be far greater.

She continued: “The construction sector looks particularly vulnerable as raw material availability,
combined with record inflation, has significantly reduced the margins for many SMEs. We are also seeing evidence of over‐trading within construction as the sector’s boom post‐lockdown has caused
real cashflow issues that are now impacting on businesses.”

Although official Government support measures are unwinding, Ms Palmer says there are indications
that the authorities are willing to help businesses which are trying to fight on.

She added: “Anecdotally, we are hearing stories about HMRC giving companies two or even three
years to pay their tax bills.

“Extra leniency may not be an official policy, but it sends a signal that officials are trying to help
businesses survive – even though it might only be delaying the inevitable.”

Top 10 Distressed Sectors*

Support Services 93,041
Construction 75,825
Real Estate & Property Services 75,052
Professional Services 41,129
Telecommunications & IT 38,006
General Retailers 35,962
Health & Education 32,583
Media 24,773
Other Manufacturing 21,369
Bars & Restaurants 20,846

  Distressed Companies by Region*                                 

London 159,476
South East 106,047
Midlands 69,129
North West 55,728
South West 41,372
East of England 40,558
Yorkshire 34,203
Scotland 29,902
Wales 17,227
Uncoded 15,479
North East 11,364
Northern Ireland 8,683

* Number of companies exhibiting significant financial distress.

Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:

“The growth in significant financial distress is very concerning and provides further evidence of the
pressure the current economic backdrop is placing on UK businesses. With nearly all sectors
experiencing a deterioration of their financial position since the last quarter, the ongoing supply chain
issues and a 30‐year record for inflation are less than ideal for companies that have already been hard
hit by the pandemic.

“This new data, combined with the recently published Government insolvency statistics which
highlighted a 33pc rise in corporate insolvencies in December 2021 vs December 2019 demonstrates
that 2022 is going to be very difficult for many SMEs.

“Aggressive creditor action is often seen as a leading indicator for insolvencies, and the 100%+ increase
in CCJs demonstrates that companies are taking a tougher line on recovering debts, in many cases to
ensure their own survival.

“Ultimately, these market dynamics, on top of the withdrawal of government support measures and
protection, is likely to lead to a rapid acceleration in insolvency rates over the course of 2022 and

About the author

Ric Traynor

Executive Chairman

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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.

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