Number of companies in trouble soars by 43%

Corporate insolvencies set to remain high till 201

Nearly 200,000 companies are in financial difficulty, with those in Scotland currently faring the worst in what is likely to be a prolonged UK recession, Begbies Traynor has revealed.

The number of companies suffering "significant problems" soared by 43 per cent to 190,559 in the second quarter of this year, found its quarterly Red Flag Alert report.

Ric Traynor, executive chairman of Begbies Traynor, said: "It shows the recession is likely to be prolonged, possibly more prolonged than the last recession, and there is no evidence yet of a real recovery emerging."

Despite this, the actual number of companies with "significant problems" actually fell by 14 per cent in Q2 from the first-quarter figure of 222,479, when GDP plummeted by 2.4 per cent in Q1.

While it is true that the rate of growth of companies with significant or critical financial problems slowed for the second quarter in a row, Begbies Traynor said that corporate and personal insolvencies, as with levels of unemployment, tend to be indicators that lag any change in economic activity, Mr Traynor said, and are "therefore likely to continue to rise for up to two years after the commencement of economic recovery."

Begbies Traynor forecasts that the period to 2012 will see a "large number" of corporate insolvencies, probably above the peak levels experienced during the height of the last recession in 1992.

Nick Hood, a partner at Begbies Traynor, said that the sectors currently suffering the most were wholesalers, engineering, manufacturing and retail. He said: "The wholesalers are in trouble, manufacturing seems to be experiencing some real problems, as is engineering. Wholesalers are feeling the pinch because it is the backwash from the retail sector."

Businesses in Scotland are finding life the toughest. The number of Scottish companies with "critical problems" soared by 107 per cent to 207 in the second quarter of 2009, year-on-year. The average uplift was 43 per cent across the UK's other regions.

Mr Hood said the fact that Scotland's two biggest banks, RBS and HBOS, have faced difficulty over the past year had not helped businesses that rely on them. He said: "RBS and HBOS remain significant providers of credit in Scotland. There is a level of fear and worry in the banking sector about making mistakes and backing companies that were good before the recession but are now damaged, and that is most keenly felt in Scotland than anywhere else." Mr Hood added that HBOS and RBS both have large retail banking operations that are important to Scottish business.

Of the other regions, the East Midlands were the next worst performer in Q2, with a 60 per cent increase in the volume of companies enduring "critical problems", followed by the North-east and Yorkshire, up by 57 per cent.

In contrast, businesses in the North-west and North Wales were the most robust, with only a 29 per cent increase in firms facing difficulty compared to last year. Across the UK, Mr Hood said: "The problems they still face are the level of liquidity, either because their customers cannot pay them or because the banks will not give them enough of the working capital they need."