The number of British companies in financial distress rose by 6 per cent in the last three months of 2009, to 140,000, raising fears the worst effects of the recession are yet to come.
Begbies Traynor, the insolvency specialist that produced the figures, warned that although these numbers were better than at the peak of the credit crisis after Lehman Brothers, the US investment bank, collapsed in September 2008, they would probably worsen again by the end of this year
Unemployment levels, currently at 2.49 million in the UK, and corporate and personal insolvencies generally lag technical recessions by one to two years, the firm said.
But, in this case the company bloodbath is likely to worsen once a Government scheme to delay making tax demands for troubled companies runs out.
The scheme known as “time-to-pay” introduced by the Government early last autumn, which allows companies to defer paying their bill for three to six months triggered a rush of 242,000 businesses asking for deferral of a total £4.2 billion in tax.
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Begbies said: “HMRC remains one of the principal creditors in many insolvencies and we fear that when the current “time-to-pay” scheme, which provided a lifeline to many businesses, is finished there will be a significant rise in company failures - most probably from the third quarter of 2010 onwards.”
Nick Hood, a partner at Begbies Traynor, said: “A significant number of the companies that got into the scheme probably won’t survive. The problem is that it is encouraging companies to go on trading and racking up debt beyond a point where they ought to.
“When the Government introduced the scheme, I don’t think they expected the rush of companies they got. Most companies found it remarkably easy to get the referral, they just had to ring their local tax office and ask nicely. Alistair Darling in his Pre-Budget Report said he was extending the scheme but he didn’t say for how long. Anecdotally, we’re hearing that HMRC is now starting to clamp down. “
Until recently, tax offices had been granting extensions to payment deferrals but they are now starting to refuse, he said.
Ric Traynor, executive chairman of Begbies Traynor, said: “There is every reason to suggest that the insolvency peaks of this recession remain some way off.
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“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.”
He also pointed that the last quarter’s rise in number of companies in distress - defined as those that have either begun wind up proceedings or face court action have insolvent or out of date accounts - came despite the 2.5 per cent VAT decrease and the car scrappage scheme.
In fact the automotive sector showed the highest quarter of quarter increase, up 26 per cent in critical actions.
Begbies also noted that there was a new trend emerging of business failures were occurring at a far earlier stage than in previous recessions.
The figures come as hedge fund manager Bertrand de Pallieres prepares a law suit against a Greek telecoms group Wind Hellas for deliberately relocating to Britain just before it went bankrupt so that it could use British bankruptcy rules to enter a controversial pre-pack administration, dumping its debts on its creditors.