Surge in companies facing collapse as Government chases down Covid debts

The number of companies in critical financial distress increased by more than one-third year-on-year at the end of 2022, according to an insolvency specialist which warned of an influx of small businesses teetering on the brink of closure.

Begbies Traynor warned that the Government and HMRC are chasing down Covid debts that could cripple small businesses forced to repay loans.

The business recovery and advisory firm’s “red flag alert” report revealed a 36% increase in the number of companies rated as being in “critical financial distress” in the last three months of 2022, compared with the same period a year ago.

It marked the sixth consecutive quarter that business in critical distress levels had risen.

The picture is particularly bleak for companies in the hospitality sector, who have faced soaring energy bills while recovering from the impact of Covid lockdowns.

Critical distress levels among hospitality businesses, like pubs, restaurants and hotels, rocketed by 157% compared with last year’s data, Begbies Traynor said.

The firm warned that insolvencies could spike after April when the Government reduces its energy support and firms are hit with higher bills.

Many of these small businesses also still have Covid-related debts to repay, such as bounce back loans which enabled small and medium businesses to borrow up to £50,000 from the Government.

“These factors combined with falling consuming demand could wreak havoc on an already vulnerable sector”, Begbies Traynor warned.

Julie Palmer, a partner at Begbies Traynor, said: “We’re taking calls from company bosses who are having trouble digging deep enough to keep battling on.

“They are already having to pay back the support they took to get through Covid and, anecdotally, we are hearing that both the Government and HMRC are becoming more determined in pursuing debts, while other creditors are increasingly turning to the law to recover their debts.”

The report also flagged a rapid rise in county court judgements (CCJs) – which can be brought against someone who fails to repay debts, and are a leading indicator of financial distress.

There were 23,885 CCJs in the last quarter of 2022, a 52% increase compared with the number recorded during the same period in 2021.

And winding up petitions, much more serious action lodged by creditors, totalled 576 in the same period, a surge of 131%.

Ms Palmer added: “Considering what directors of businesses are facing, I’m very surprised that we are not seeing more of them finally giving up and shutting down.

“That so many are holding on in the face of such strain is a testament to their abilities to manage their way through incredibly tough times and a seemingly endless run of fresh hurdles.”

A number of big businesses fell into insolvency in recent months, blaming the tough economic climate for diminishing profits.

Furniture retailer Made.com collapsed last year, resulting in hundreds of redundancies, and fashion chain Joules axed more than 100 jobs after it was bought out of administration.