Increase in companies facing bankruptcy as government chases Covid debts

The number of companies in critical financial distress rose by more than a third year-on-year at the end of 2022, according to a bankruptcy expert warning of the influx of small businesses on the brink of closure.

Begbies Traynor warned that the Government and HMRC are chasing Covid debts that could paralyze small businesses that have to pay back loans.

The business recovery and consulting firm’s “red flag alert” report revealed a 36% year-on-year increase in the number of companies rated as “critical financial distress” in the last three months of 2022.

The business, which marked the sixth consecutive quarter, rose to critical distress levels.

The picture is particularly bleak for companies in the hospitality industry, which are facing rising energy bills as they recover from the impact of the Covid lockdowns.

Begbies Traynor said levels of critical distress among hospitality businesses such as bars, restaurants and hotels are up 157% compared to last year’s data.

The firm warned that bankruptcies could rise after April when the government reduced energy subsidies and firms hit with higher bills.

Many of these small businesses still have Covid-related repayment debts, such as repayment loans that allow small and medium businesses to borrow up to £50,000 from the Government.

“These factors, combined with falling consumption demand, could take a huge toll on an already vulnerable industry,” Begbies Traynor warned.

Julie Palmer, a partner at Begbies Traynor, said: “We’ve been getting calls from corporate bosses who are having trouble getting deep enough to continue fighting.

“They already have to repay the support they received to get through Covid, and anecdotally, we are hearing that both the Government and HMRC are becoming more committed to pursuing debts while other creditors are increasingly resorting to legislation to get their debts back.”

The report also pointed to a rapid increase in district court judgments (CCJs), the leading indicator of financial distress, that can be filed against someone who does not pay their debts.

In the last quarter of 2022, there were 23,885 CCJs, an increase of 52% compared to the number recorded in the same period of 2021.

Liquidation petitions, which are much more serious lawsuits filed by creditors, increased by 131% to 576 in the same period.

Ms Palmer added: “Given the situation business managers are facing, I’m shocked that we didn’t see more of them finally give up and close.

“The fact that so many have held up in the face of such pressure is a testament to their ability to overcome incredibly difficult times and seemingly endless new obstacles.”

A number of large businesses have gone bankrupt in recent months, blaming the harsh economic environment for declining profits.

Furniture retailer went bankrupt last year, resulting in hundreds of layoffs, and fashion chain Joules laying off more than 100 businesses after it was bought from management.

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