Begbies warns of another wave of failures

Ric Traynor, executive chairman of the insolvency and business recovery group, said many struggling businesses, which have survived the recession but are being propped up by Government support and record low interest rates, must work through the system before confidence can fully return to the UK economy.

Mr Traynor was speaking as Begbies, which has offices across Yorkshire, reported flat activity levels in its core insolvency arm in the six months to the end of April. It believes this rate will continue in the short term.

However, the group expects its results for the year to the end of April to be ahead of last year, in line with market hopes.

Mr Traynor said state support such as quantitative easing and the Time to Pay scheme, which grants businesses breathing space on late taxes, are propping up otherwise unviable businesses.

"There are quite a few businesses which should have gone into formal insolvency," he said.

"Really at some stage they will need to be dealt with. It's effectively a purge and the new growth starts from there."

Government insolvency statistics showed a five per cent fall in corporate insolvencies in the first quarter of 2010, compared with the previous quarter.

This was the fifth successive fall in national insolvency volumes, which Begbies said reflected the impact of Government support and monetary policy.

Figures from the first quarter – January to the end of March – showed more than 161,000 businesses in "significant" or "critical" distress, according to the group's Red Flag report. Between them they owe more than 55bn to creditors, according to the group.

Numbers of struggling businesses were down 13 per cent on the same period a year ago, but increased by 14 per cent on the previous three months.

This picture was mirrored in Yorkshire and the North East, where there were 14,317 struggling businesses, 13 per cent fewer than a year ago, but 14 per cent higher than three months earlier.

Begbies has offices in Doncaster, Halifax, Hull, Leeds, Sheffield and York.

"The (public sector) cuts which are likely to happen... the rising interest rates when they happen, and the gradual reduction in support measures (mean) I think we will start to see insolvency numbers starting to rise," said Mr Traynor.

"There's a lack of trust or confidence to put more money into business whereas if that business were to fold and the phoenix appears from the ashes, there's more (confidence).

"There has to be confidence that issues are dealt with. At the moment we could be just throwing good money after bad."

He expects the tide to turn at the end of this calendar year. This year will likely see slightly fewer than 26,000 insolvencies, similar to last year, he said. However, Mr Traynor believes 28,000-30,0000 insolvencies in 2011 are "quite likely".

Previous recessions have shown insolvencies tend to lag the economy, with the bulk emerging once the technical downturn has ended.

Begbies also announced it expects to incur exceptional costs of around 800,000 relating to a recent refinancing and restructuring. In May it confirmed new, unsecured banking facilities totalling 35m. It had net debt of 20.6m at the end of April.

Begbies also said finance director John Gittins is leaving to join computer security firm NCC Group and named Nick Taylor, the group's financial controller, as acting finance director.

'Still waiting for recession'

Analysts at brokerage finnCap said while Begbies Traynor has restructured its debt, it is "still waiting for the recession".

"The challenge for the division has been that although the onset of recession would normally be accompanied by an increasing work-flow, the effect of Government support measures to date has resulted in a more muted outcome," said finnCap.

"The corporate demands for working capital normally ensures an extension of work for insolvency practitioners once an economic recovery is under way but in current circumstances Begbies is anticipating a relatively flat first half in 2011."

finnCap said the group's share price has been de-rated, but the catalyst for an increase has not yet arrived.

"We believe the process is complete but the grounds for an upward movement are not yet in place," they said.

"Having restructured group debt, Begbies has plenty of headroom within facilities to fund business growth and complementary acquisitions."