- Steep rise in country court judgments
- Supply chain issues feed into business uncertainties
Insolvency practitioners will rub their hands with glee when they read Begbie Traynor’s (BEG) latest Red Flag Alert report, which says that over half a million UK businesses are in financial distress and wide-spread closures are imminent.
According to figures for the third quarter of 2021, the number of country court judgments (CCJ) lodged against companies has shot up by 139 per cent to 21,769 compared with the same period last year. Meanwhile, the number of ‘critically distressed’ businesses - defined as those with minor CCJs of more than £5,000 filed against them - has risen by 17 per cent compared with the previous quarter.
It is unhelpful to read these figures in isolation, however. Government support measures introduced last year, including a moratorium on winding-up petitions, artificially suppressed creditor action for much of 2020 and 2021. In contrast, in the third quarter of 2019 a hefty 26,000 CCJs were lodged against indebted companies, according to a Red Flag report from last year. Moreover, in spite of Begbie Traynor’s ominous tone, the number of businesses in significant financial distress has fallen compared with Q2 2021, with pent-up customer demand fuelling a boom in consumption and allowing some companies to improve their short term debt position.
This is not to underplay the threat businesses face. According to the Office for National Statistics, business closures were higher in July to September 2021 than in any Q3 since 2017. Worryingly, these closures took place when a large bulk of government support measures were still in place. (Temporary measures introduced by the Corporate Insolvency and Governance Act 2020 began to be phased out from 1 October).
Begbie Traynor predicts that there are many more insolvencies to come, citing constrained raw material availability, rising inflation, labour shortages, spiralling energy prices and rising Covid-19 rates. Samantha Keen, UK turnaround and restructuring strategy partner at EY-Parthenon, added that there were above average profit warning levels in September driven by supply chain and cost issues.
“Government support has insulated many companies from the true impact of the significant level of change linked to the pandemic, the UK’s departure from the EU, and other market forces – such as digitisation and the transition to net zero,” Keen said.
It is not all doom and gloom, however. For companies that like nothing better than an economic downturn, activity levels are on the rise. Manolete Partners (MANO), a litigation funder which specialises in insolvency claims, has reported its highest number of case referrals since last summer and is recruiting extra lawyers to prepare for an expected caseload surge. Morbid, but potentially lucrative.
