Begbies Traynor’s red flag alert research has recorded 630,000 businesses in 'significant distress' after the largest numerical quarterly leap (73,000) in financially distressed companies since Q2 2017. This 13% increase (from 557,000 in Q3 2020) comes as the UK is plunged into another nationwide lockdown.

The research indicates a 27.5% year-on-year increase in 'significant distress' (136,000 businesses) since Q4 2019 overall, with a 38% hike in financial services companies reporting serious difficulties,  real estate and property services increasing by 39% and hotels and accommodation increasing by 32%.

Every one of the 22 sectors monitored by the research exhibited an increase in significant distress, with 18 sectors experiencing double digit increases in the final quarter of 2020.

Begbies Traynor cautioned the current figures are likely to be ‘the tip of a very large iceberg’, as the coronavirus pandemic has reduced court activity limiting the number of CCJs and winding up petitions being issued against indebted companies and there has been a ban on winding up petitions for Covid-related debts.

The firm pointed to data showing there were 14,030 CCJs lodged against companies during October, November and December in 2019, with only 9,716 lodged during the same period in 2020, a fall of 31%.

Over the same three months in 2019, 644 winding up petitions were lodged compared to just 94 during the same period in 2020, a fall of 85%.

Julie Palmer, partner at Begbies Traynor, said: ‘Without the financial aid and support measures that the government has put in place during the pandemic insolvency levels would have been much higher, however the sad truth is that for many companies this will provide little more than a stay of execution as debt levels become unmanageable and structural changes across many sectors take their toll.

‘Although the government has extended its Covid-19 financial support, this simply won't be enough for thousands of businesses who likely will not survive in the interim.’

Administrations

Separately, research from KPMG shows the number of companies going into administration fell to historic lows during 2020.

However, Blair Nimmo, head of restructuring for KPMG in the UK cautioned the figures ‘provide a distorted view of reality’, because of the impact of the array of government Covid-19 support schemes.

Analysis of notices in The Gazette  showed that 1,112 companies went into administration over the course of last year – this is the lowest annual total since KPMG started tracking the data in 2005, and a fall of 22% on 2019, which saw 1,425 administrations.

Insolvency appointments in the final quarter of the year were particularly low, with only 216 companies entering into administration from October through December – again, the lowest quarterly total since 2005.

The number of insolvencies seen in the leisure and hospitality industries – which have borne the brunt of the impact of lockdown restrictions – also fell sharply from 49 in Q3 to 27 in Q4. However, this sector still accounted for the lions’ share of administrations, alongside building and construction (27); real estate (24) and retail (22).

Nimmo said: ‘Comfort can be taken from the fact that fewer businesses than expected have been forced into insolvency during the crisis, as the breadth and depth of support measures available, coupled with a supportive lending community, have given organisations that vital lifeline.

‘We also know that there are a number of sectors, including the likes of tech, online retail and financial services, which have seen something of a Covid-bounce.

‘We need to be clear, however, that these figures provide a distorted view of reality. 

‘Those businesses that remain in hibernation due to ongoing lockdown measures, such as those in the leisure and hospitality and travel and tourism sectors, continue to accrue liabilities while seeing precious little cash flow into the business.

‘At some point, rent and tax deferrals and loans will need to be repaid. The job retention scheme will unwind. Weaning off these support schemes is going to be a massive challenge for many.’