Pace of business failures slowing

Insolvency experts said the pace of UK corporate failures in recent months had slowed but warned that the number could spike as the UK comes out of recession.

National insolvencies in August totalled 1,384, the lowest month on record since September 2008, while the latest figures, which are to mid-September, indicate that numbers are still falling, according to PwC, the accountancy firm.

The level of insolvencies remains above those registered in August 2008 (1,200), before the collapse of Lehman Brothers.

Year-on-year comparisons of these figures show that, with the exception of real estate in August this year, the situation is still worse than it was 12 months ago.

“We are finally seeing a tail-off to the huge numbers of insolvencies this recession has brought,” said Mike Jervis, at PwC Business Recovery Services.

Mr Jervis added that, while he expected this trend to continue into 2010, the levels were still extremely high.

“If we look back at previous recessions, we can see that there is often a spike in the number of companies going bust as an economy recovers – simply because businesses take their eye off the key factor: cash.”

Insolvency specialists have warned that companies remain as vulnerable coming out of recession as they do going in and that the number going through financial restructuring was likely to increase as the economy recovers and lenders feel more confident about their outlook.

The number of insolvencies – including administrations such as that of Coffee Republic but also company voluntary arrangements sought by the likes of JJB Sports and Focus DIY to restructure debts – reached a 10-year high of 1,977 in March 2009.

For those companies able to survive the turmoil, PwC estimate that from the top 10 UK insolvencies alone there is £12bn ($19bn) in turnover to be won.

The retail sector provides the biggest potential opportunity with a string of failures over the past year, including Woolworths and MFI, which had revenues totalling £6.58bn.

“There is no question that UK companies have been hit very hard by the recession – achieving 80 per cent of budgeted revenue is now [the] norm,” said Mr Jervis.

“We would strongly advise companies that if they want to survive, they must continue to cut back on costs and concentrate on driving revenues back up.”

A survey by PwC of directors specialising in turning round business showed that 85 per cent believed their key trading indicators had levelled out or were starting to improve.

However, they have lingering concerns over companies’ readiness to accept they need help with 56 per cent of respondents still finding this to be a main barrier and 86 per cent of turnround directors finding it the same or harder to raise new funds.