Official end of recession a ‘false dawn’ for business

Insolvency experts have warned that company collapses will hit record levels this year

R3, the industry body for insolvency practitioners, has said that the official end of the recession, confirmed by government figures released yesterday, could be a false down for many businesses as insolvencies peak this year and stay high in 2011.

Based on a poll of 1,700 insolvency practitioners, R3 predicted that insolvencies would peak in 2010 at 28,000, with the situation improving only slightly in 2011, with 27,000 insolvencies.

Experts believe that creditors will become more aggressive as the economy picks up, contributing to a post-recession insolvency spike.

Steven Law, vice president of R3, told Startups: “Creditors will become braver about taking action when they think that businesses might be starting to improve and the ability to pay debts is enhanced.”

A less accommodating attitude from tax authorities could also be a contributing factor to an “insolvency lag”, as HMRC becomes less lenient, especially if an incoming government seeks to cut public debt.

“HMRC has been very kind to businesses during the recession, but they will need to start toughening up to start recovering what’s owed to them,” Law warned.

R3 also pointed to evidence from previous recessions. The recovery period after the downturns of the 1980s and 1990s were also dangerous times for businesses.

“We can only base our thoughts on what’s happened historically and it always takes a little while for things to shake out in terms of insolvency numbers,” said Law.

“We typically see five quarters of lag and I can see that playing out again. Our members are already reporting that they’re busier now than they were in 2009.”

The time it takes for tangible benefits of recovery to be felt by companies is generally ignored by creditors and policy-makers who traditionally use evidence of the recovery to aggressively chase debts or scrap schemes aimed at helping troubled small businesses.

“The most important thing for small businesses is to keep your head above the parapet,” Law said. “Talk to creditors, landlords and the Inland Revenue and the bank. Nobody likes surprises. Take advice early and don’t bury your head in the sand.”

Article from www.startups.co.uk




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