CoronavirusCorporate Finance

557,000 UK businesses in ‘significant distress’

The latest Red Flag Alert research for Q3 2020 has recorded 557,000 businesses in ‘significant distress’ after the largest quarterly leap in financially distressed companies since 2017, according to accountancy firm Begbies Traynor.

The 6% increase from 527,000 in Q2 2020 in the last three months comes despite a backlog of court action which has limited the number of CCJs and winding up petitions being issued against indebted companies and the ban on winding up petitions for Covid related debts.

The newly published research also found that there has been a 9% increase in significantly distressed companies since the end of the first quarter (509,000 Q1 2020, 557,000 Q3 2020) – two weeks into lockdown.

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Since this time there have been double-digit percentage increases in financial distress in 10 out of 22 sectors analysed. This includes food and drug retailers (14%, 13,018 Q1 2020, 14,806 Q3 2020), construction (11%, 65,456 Q1 2020, 72,402 Q3 2020) and real estate and property (11%, 56,421 Q1 2020, 62,615 Q3 2020) sectors.

Begbies Traynor added that the rise “could have been much higher”, were it not for reduced court activity due to the coronavirus pandemic.

Official government data shows there were 26,244 CCJs lodged against companies during March, April and May in 2019, with only 10,045 lodged during the same period in 2020, a fall of 62%.

The situation was “even more acute” with regard to more serious winding up petitions. During March, April and May 2019, 1,019 were lodged compared to 101 during the same period in 2020, a fall of 90%.

Julie Palmer, partner at Begbies Traynor, said: “It is noteworthy that the number of businesses in significant distress have grown substantially in the last three months, even with court capacity significantly reduced due to the pandemic.

“With so many businesses limping along there could be a flood of insolvencies when the courts do get back to anywhere near normal capacity and attempt to clear the backlog of pending cases. This in itself, combined with the end of the furlough scheme and other government support measures is likely to have a material impact on the UK business failure rate.”

She added: “Unfortunately for the many zombie companies in existence across the UK ,a perfect storm is on the horizon.

“A combination of a grim economic data, and very poor trading conditions, particularly in the most vulnerable sectors, such as hospitality will take its toll and this is expected to feed through to Q1 2021, particularly when the government ends its high profile corporate life support measures.”

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