Almost 148,000 UK companies are facing ‘significant’ or ‘critical’ financial problems

In todays Red Flag report from Begbies Traynor almost 148,000 UK companies are facing ‘significant’ or ‘critical’ financial problems whilst those with ‘critical’ problems alone are struggling with nearly £53 billion worth of liabilities.

The report, which monitors the early warning signs of company distress, shows a 4% increase to 147,836 companies which experienced ‘significant’ or ‘critical’ financial distress in Q4 2010, compared to 141,527 companies in Q4 2009, representing the first year on year increase for seven quarters.  The 147,836 companies also represented a 20% increase from 123,361 in Q3 2010, which was considerably more pronounced than the usual seasonal increase as seen this time last year (the number of companies increased by 6% from Q3 2009 to Q4 2009).

Whilst these figures are heavily weighted to the less severe category of companies facing ‘significant’ problems (representing 144,818 companies in Q4 2010), the data shows a marked increase in actions taken by trade creditors against their debtors.

The 3,018 companies experiencing ‘critical’ financial problems alone owe a total of £52.7 billion to creditors, suppliers and service providers, which compares to £57.5 billion owed by 2,943 companies in Q3 2010.  The decrease in the average size of liabilities, from Q3 to Q4, indicates that a higher proportion of SMEs are suffering increases in financial distress.

Dark clouds indeed are gathering.

HMRC Business Payment Support scheme and keeping proper records

In 2008, HMRC launched its Business Payment Support scheme, which has recently been extended for the duration of the present Parliament. Popularly known as ‘Time to Pay’, the scheme allows struggling businesses to defer tax payments.

However, recently business owners have expressed concerns that HMRC is taking a harder line despite the fact that they are willing – but unable – to pay.

Geoffrey Rogers, of Geoffrey Rogers Chartered Accountants and Tax Consultants in Plymouth, believes small firms – charged with creating jobs and driving economic growth - want to comply with their tax requirements but are not being given enough support to do so.

He said: “With banks still not lending, late payment on the up and other factors hitting cash flow, many small businesses are still facing an incredibly tough financial climate and signs that HMRC is set to pull the rug from under them are worrying.

“It’s typical that HMRC is going to fine small businesses for not keeping ‘proper records’ when it does not offer any real definition of what this means. Without clarification, and certainly without better education, in many cases, fining small businesses for poor record keeping would be like punishing a child with learning difficulties for poor reading. “Once again we are looking at the big stick being favoured instead of the carrot, which is, I’m afraid, typical of HMRC’s current approach.

2011 will see continued record levels of personal insolvency

Personal insolvency specialists, RSM Tenon predict that annual personal insolvencies over 2010 are likely to exceed the record level set last year of 134,132.

With the upcoming increases in VAT and the inevitable rise in interest rates combined with the public sector cuts, RSM Tenon is predicting continuing record levels of personal insolvencies throughout 2011. Mark Sands, Head of Bankruptcy & Personal Insolvency at RSM Tenon, said: “As we come to the end of 2010 we are recognising that there have been record levels of personal insolvency again this year. Around 135,000 people have used personal insolvency as a last hope for dealing with their financial troubles, which is still approximately 25% higher than pre-credit crunch levels. We expect that this figure will increase to around 140,000 over 2011 with the rate set to continue until the 2012 Olympics.

Bibby Financial Services comments on banks failure to lend £30bn to UK small businesses

Commenting on a report released yesterday by the National Audit Office, which shows banks have failed to lend a target of £30 billion to small businesses in the UK, Edward Rimmer, UK chief executive at Bibby Financial Services, says:

“The fact that there is a £30 billion discrepancy between the amount of money lent to small business in the UK and the original target set by the Government is disappointing. This situation is made worse by the determination of the banks to provide £7 billion in bonuses to senior staff over the next few weeks, despite their reluctance to lend. This may rub extra salt in the wounds of UK firms, many of which continue to struggle in the current economic climate.

“We know from our own research* that, despite the UK officially being out of recession, almost a quarter of businesses (22 per cent) feel that trading conditions are tough and they are only just surviving. This proves that there is a clear necessity for businesses to be financially supported and by depriving them of £30 billion of rightful funding, the banks have not played their part in boosting both business confidence and performance.

“We all know that access to finance is intrinsic to the survival and growth of our country’s small businesses, which are the engine room of our economy, and the Government set the business lending target for a reason to ensure this would happen. With this in mind, it is not acceptable that financial support has been withheld when it is clearly needed. For example, we have seen a 10 per cent increase in the number of firms using our invoice finance facilities in 2010. Businesses are not only recognising and trusting invoice finance as a more flexible and accessible form of funding, compared to bank overdrafts and loans, but also a more reliable one.

“Looking ahead to next year, it is vital that the Government and Vince Cable take robust action to ensure banks increase lending to UK businesses and allow them to achieve their potential to drive economic revival in this country.”

* Bibby Financial Services Business Factors Index, October 2010

Philip King raises the standing of credit management

Institute of Credit Management (ICM) Chief Executive, Philip King, is to join the working group of the Small Business Economic Forum (SBEF), a Government initiative championed by the Minister for Business and Enterprise, Mark Prisk, MP.

The SBEF’s working group comprises select representatives from the small business, accounting, banking and credit communities. Its main aim is to ensure that small businesses can take concrete benefits to support growth from the Forum’s discussions. The first working group will meet this month.

Philip King was personally invited to join the working group by Mark Prisk, MP, following the Forum’s inaugural meeting in October 2010. At the working group meetings, Government officials, along with attendees, will set the agenda for the next Forum meeting to focus on the most pertinent issues faced by SMEs in the UK.The invitation further highlights the importance the Government sees in the credit management for aiding small business growth and economic recovery.

As Philip says: “The working group will lead new small business initiatives, and by being part of the group we have the opportunity to ensure that credit management has a key role.“It is significant to see the Government engaging with business leaders and industry figures in this manner; as a group we need to ensure it has a positive impact on small businesses.”

Lehman/ Nortel High Court judgment

Pensions Regulator response.

Mr Justice Briggs last Friday handed down his judgment in a case brought by the administrators of 20 insolvent companies in the Lehman Brothers and Nortel groups.

The Pensions Regulator was a respondent in the case, together with the trustees of the Nortel and trustees of the Lehman Brothers UK pension schemes. These two schemes account for more than 43,000 members.

Mr Justice Briggs ruled that where a Financial Support Direction (FSD) is issued against a company after insolvency, the cost of complying with that direction is an expense in that insolvency. It therefore must be paid before any distributions to unsecured creditors.

The Pensions Regulator welcomes the judgment. It confirms an FSD is valid if issued after an insolvency event. In particular, it supports the claims of the Nortel and Lehman pension trustees in their respective administration processes.

More generally, this ruling clarifies the effect of an FSD on an insolvent target. However, it will not alter the regulator's approach to determining FSDs in any situation.

Our statutory objectives require us to protect pension scheme members and the Pension Protection Fund.

In pursuit of these objectives, we can issue an FSD to secure reasonable financial support is provided to a pension scheme. We are required by the Pensions Act 2004 to act reasonably in using these powers and to have regard to the interests of those directly affected by them.

Where schemes are left with inadequate financial support, the regulator engages with all who might have a responsibility to support the scheme to ensure, where possible and reasonable, that the interests of scheme members are protected.

Where an FSD is issued, the form and sum of any resulting financial support will be proposed by the company or companies concerned, and approved by the regulator if it is reasonable in all the circumstances.

R3 response.

Last Fridays ruling could have consequences for the UK’s business environment and highlights a conflict between insolvency and pension law. Judge Michael Briggs himself notes this decision could be ‘an impediment to the achievement of the objectives of the rescue culture’.”

“Promoting outstanding pension debts to super-priority status after the insolvency means that returns to unsecured and preferential creditors could be wiped out. Under this scenario business rescue procedures make less sense and creditors have less certainty when lending in the first place. While some pension funds may benefit, other creditors will suffer as will the value generation capacity of UK plc overall.”

John Frances, Technical Director of R3, the insolvency trade body

Retail Insolvencies

Insolvencies across the retail sector decreased by 14% year on year during Q3, suggesting the sector is improving. However, insolvencies across all sectors decreased by 23% year on year during Q3, suggesting that Retail is not bouncing back as quickly as other sectors.

With VAT set to rise to 20% on 4 January 2011, there is growing concern from a variety of commentators that the retail sector is set to suffer a wave of administrations, closures and job losses early in the New Year.

Many retailers have introduced pre-Christmas promotions and discounts earlier than normal in an attempt to drive sales. A leading consumer research group (Nielsen) has disclosed that Christmas puddings were on promotion in September, two months earlier than 2009. In addition, the British Retail Consortium recently revealed that consumer confidence is falling due to forecast job losses in the public sector.

Anticipating that the New Year could be one of the most difficult in living memory for retailers, one of the UK’s leading business recovery firms, RSM Tenon, has launched a free helpline for retailers. The 'Retail Survival Service' aims to help worried retailers weather the storm through Q1 2011. “Larger retailers will have factored the rise in VAT into their forecasts and prepared for it as best they can. The sector has been hit hard over the last few years and businesses recognise that they should start sales earlier. There is a ‘Feast and Famine’ effect. Retailers want to capitalise on the Christmas period as they know that everyone traditionally spends at Christmas time and tightens their belts in January.

With the increase in VAT to hit early next year as well, there will be more tightening of belts than before. Q1 2011 will be a particularly hard time for retailers, hence the reason for our free service. “Retail is a crucial sector in the UK economy and has led the country out of recession in the past while playing a key role in the regeneration of towns and cities. We need to ensure retailers are fit to deal with the next few months when spending is going to contract, and costs remain static or even rise.