Home Finance & Investments Insolvencies delayed by Government support measures but over 14,000 businesses in the...

Insolvencies delayed by Government support measures but over 14,000 businesses in the North East are in early financial distress

While the Government’s insolvency prevention measures appear to be delaying companies from entering insolvency, the latest Red Flag Alert data published today (22 April 2021) by leading business rescue and recovery specialist, Begbies Traynor, shows that in the North East there has been a 43% year on year rise in the early signs of financial distress with 14,400 businesses in the region now affected.

In the first quarter of 2021, ‘significant’ distress, which indicates early signs of financial problems, rose by 16% in the North East compared with the last quarter of 2020. In contrast, there was a striking decrease in the number of instances of the more advanced ‘critical’ distress (which refers to businesses that have had winding up petitions or CCJs totalling more than £5,000 against them), showing that the Government’s insolvency prevention measures are having an impact. ‘Critical’ distress among the region’s businesses fell by 25% year on year, and saw a drop of 3% compared with the previous quarter.

This picture was reflected more starkly across the UK which saw a 42% rise in levels of businesses in early distress compared with the same quarter the previous year which was immediately before the pandemic struck. ‘Significant’ distress rose by 15% quarter on quarter with 722,551 firms across the UK now experiencing this type of distress. However, more advanced distress fell by 32% compared with Q1 2020, and remained at the same level as Q4 2020.

“After more than 12 months of multiple lockdowns and restrictions, the true extent of the financial pressures facing businesses is still largely being hidden by the government’s insolvency prevention measures which makes these latest figures even more concerning,” comments Gillian Sayburn, partner for Begbies Traynor in the North East. “While there has been a marked reduction in advanced distress in the last quarter, this has been overshadowed by the escalation in signs of early distress. Although the Government has been successful in delaying liquidations and bankruptcies, there is still an enormous amount of financial trouble brewing, much of which will emerge later in the year when these and other support measures come to an end.

“Added to this, the courts are still struggling to catch up with the backlog and so there are likely to be many more actions against indebted companies in the pipeline.”

The quarterly Red Flag Alert research, which monitors the UK’s financial health, shows that ‘significant’ distress in the North East has increased by at least 20% since the previous year in every one of the 22 sectors identified. One of the worst affected in the region was financial services which saw a 68% rise in early signs of distress compared with the first quarter of 2020; along with utilities (up by 62%); travel and tourism (57% increase); real estate and property (56% rise); and construction and telecommunications (both rose by 52%).

All sectors except hotels (down by 2%) saw their fortunes worsening since the previous quarter which itself had shown escalating levels of distress. Those with the highest increases in ‘significant’ distress were financial services (34% increase); construction (up by 22%); real estate and property (20% rise); and media (up 18%).

Andrew Little, partner for Begbies Traynor in the North East, added: “Beleaguered businesses in the UK are facing a number of challenges including the threat of further waves of the COVID-19 pandemic, together with the disruption caused by Brexit. Concern that the Government’s financial support could be propping up unviable ‘zombie’ businesses is also growing, and, once this aid ends, there will be a flood of insolvencies. These heavily indebted and weak companies actually have a negative impact on the economy, using investment which could support the growth of other, nimbler companies.

“While it is good news that the UK economy is opening up, businesses in the region should prepare for some tough times ahead.”