Pictured above: John Kelly

The number of troubled companies in the West Midlands has fallen, but another wave of insolvencies is expected next year, according to business rescue, recovery and restructuring specialist Begbies Traynor.

In its latest Red Flag update, which monitors the warning signs of companies in distress, Begbies Traynor reports that in the West Midlands County there were 6,938 companies in the second quarter of 2010 facing significant or critical difficulties, compared with 8,830 in the first quarter and 8,508 in the second quarter of last year.

For the West Midlands region as a whole there was an 18 per cent fall to 10,876 year on year, and down 22 per cent against the first quarter's 13,880.

Companies with "significant problems" are those with either a court action and/or average, poor, very poor insolvent or out date accounts. Companies with "critical problems" are those with county court judgments totaling £5,000 or more and/or wind-up petition related actions.

Nationally, more than 127,000 companies experienced 'significant' or 'critical' financial distress, between them owing over £69.5 billion to creditors, suppliers and service providers, up from £55 billion in the first quarter. 

Begbies Traynor expects the levels of insolvencies to rise again in the first half of 2011.

Although the numbers of companies experiencing distress have fallen - by 21 per cent compared to 161,601 in the first quarter and by 31 per cent compared to the 185,813 of a year ago - they remain at historically high levels, up 15 per cent from the 111,089 of quarter two in 2008.

And there has been a 60 per cent increase in the average debts of troubled companies to around £545,000.

The report says this suggests that larger firms are now experiencing difficulties, potentially threatening greater job losses, all a reflection of the continued fragility of the UK's weak economic recovery.

John Kelly, partner in the Birmingham office of Begbies Traynor Group, said: "We believe that a combination of lenient creditor attitudes and temporary government support measures, including the extensive use of monetary instruments, such as quantitative easing and low interest rates, have all had an effect on reducing the volume of adverse actions, providing a welcome respite to many companies that may have otherwise found it difficult to survive.

"However, we are concerned that the levels of business distress will increase again, potentially from the first half of 2011, once the full effects of the coalition government's fiscal tightening measures impact the economy and particularly amongst those private sector businesses most dependant on public sector contracts. Thereafter, the levels of distress can be expected to remain pronounced for a number of successive quarters in line with the experience of recessions over the past 35 years, when the level of insolvencies grew strongly for two to four years after GDP stopped shrinking."

He pointed out that credit remained tight indicating a more selective stance towards businesses over their outstanding liabilities "with a focus on helping those that have a genuine chance of survival".

Manufacturing and automotive, critical sectors for the West Midlands, saw a 37 per cent and 34 per cent year on year reduction respectively in those with significant or critical problems.

Begbies Traynor said manufacturing had been expected to play a major role in an export-led recovery, but recent weak economic data from China and the US, the challenges facing much of the Eurozone and concerns over too many simultaneous domestic austerity programmes amongst G20 countries were leading some economists to question this.

It predicts the government's austerity measures will be felt widely, with those most directly dependent on public sector spending including construction, IT, recruitment, advertising and business services the hardest hit.

Mr Kelly added: "It will not be until after the government's Comprehensive Spending Review in October that we will know for certain the allocation of spending cuts, but there is a growing risk that, even if the UK avoids a double dip recession, it could develop a twin track economy, with public-sector dependent industries facing higher levels of financial distress than sectors which are less directly linked to government spending cuts." 

And, while levels of financial distress have improved significantly in the retail sector, the impact of the government's cutbacks on salaries and jobs are yet to come, with an increase to a 20 per cent VAT rate in the middle of the important January sales period.

Mr Kelly commented: "The coalition government is trying to strike a fine balance between reducing the UK's deficit and maintaining the recovery. Given the substantial liabilities at risk of default by businesses in distress, government support measures will need to be withdrawn gradually to avoid tipping that balance towards halting the recovery."

For more information about Begbies Traynor, please visit their website here: www.begbies-traynorgroup.com