Recession-hit firms warned worst is still to come

More than 140,000 companies fell into financial trouble in the final three months of 2009 as experts today warned the worst was yet to come for recession-hit firms.

The latest "Red Flag Alert" report from insolvency firm Begbies Traynor showed a 6 per cent hike in the number of firms that experienced financial distress between the third and fourth quarters of last year.

In an encouraging sign, the number of companies with either significant or critical problems in the fourth quarter fell 14 per cent on a year earlier, marking the report's first year-on-year decline since the recession began.

But Begbies cautioned of a significant relapse in the third quarter of 2010 as companies face the most "dangerous phase" of a recession - the recovery.

The withdrawal of Government support measures, coupled with a lack of preparation and finance for the upswing in business will hit firms, according to the group.

Ric Traynor, executive chairman of Begbies Traynor, said: "Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies have lagged behind technical recession by one to two years.

"With tax and interest rates certain to rise, as well as increasing pressure on consumer spending, there is every reason to suggest that the insolvency peaks of this recession remain some way off."

The group's report also found evidence that firms were failing faster than in previous recessions, with firms more willing to wave the white flag and companies also seeing a steeper collapse.

Today's findings revealed that the Government's soon-to-end car scrappage scheme failed to prevent a 26 per cent surge in car firms falling into "critical" financial condition quarter-on-quarter, with the number also up by a fifth on 2008, according to the study.

However, there was a marked improvement in the battered retail sector after the peak of its woes in 2008, when high profile names such as Woolworths and Zavvi went bust.

The temporary VAT reduction, which came to an end on January 1, helped contribute to a 32 per cent decline in retailers suffering critical problems compared with the third quarter, down 21 per cent year-on-year.

Scotland saw the highest number of firms hit financial woes at the end of 2009, while it was also the only region to see a rise against a year earlier.

The North East and Yorkshire, alongside the North West and North Wales were among the regions to see the biggest improvements.

Among specific industries, the construction and public sector are among those most at risk over the year ahead, said Begbies.

Construction firms are particularly vulnerable to the expected end of HM Revenue & Customs' "time to pay" support service, while impending spending cuts will hit groups with public sector customers hard.