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British Courts Are Seeing a Surge in Cases Over Unpaid Debts

British Courts Are Seeing a Surge in Cases Over Unpaid Debts

British courts are seeing a surge in claims to claw back unpaid business debts, an early warning sign that more companies could face insolvency after the pandemic.

Court orders to pay a debt are a bellwether for future insolvency and the latest data paints a gloomy picture, according to a report by advisory firm Begbies Traynor Group Plc. “The latest official figures show that court activity is picking up as creditors become more aggressive in chasing debts.”

The number of county court judgments lodged against companies jumped to 21,769 during the third quarter, 51% more than the previous three-month period and more than twice the amount seen a year earlier, the report said.

British Courts Are Seeing a Surge in Cases Over Unpaid Debts

The number of businesses in significant financial distress dropped 14% from the previous quarter with pent-up demand helping to fuel a boom in consumption. That economic tailwind has helped to provide companies with some respite, according to the report. 

Even so, big challenges for businesses lie ahead in the shape of rising inflation and energy prices, constraints on labor availability and rising Covid-19 rates as the government also winds down pandemic support measures.

 “Despite the summer economic boom, systematic problems remain, and some businesses are encountering difficulties in paying back government Covid loans,” said Julie Palmer, a partner at Begbies Traynor.  “While many businesses have returned to a sense of normality, history suggests that high levels of debts and subsequent overtrading could eventually take their toll.”

‘Toxic Debt’

U.K. corporate debt soared by 1.9 trillion pounds ($2.6 trillion) in 2020 to 6.6 trillion pounds, another recent study by Begbies Traynor found. More than 50% of the country’s businesses are “saddled with ‘toxic debt’ that may never be repaid,” according to that report. 

Company insolvencies for England and Wales jumped to 3,765 in the third quarter, up 17% from the previous quarter and up 43% compared to the previous year, according to data from The Insolvency Service released Friday. 

By far most of those insolvencies were creditors’ voluntary liquidations, the process by which directors of a company choose to place the business into liquidation to pay debt.   

“The rise in CVLs would suggest that company directors are choosing to close their businesses after trading for more than a year and half during a pandemic and deeming future success unlikely,” said Nicky Fisher, deputy vice president at insolvency and restructuring trade body R3.

©2021 Bloomberg L.P.