The number of companies going bust soared by 26.3 per cent between July and September this year as the worsening economy took its toll on UK businesses.

The Insolvency Service said that 4,001 companies fell into liquidation during the third quarter — a 10.5 per cent rise on the previous three months and a 26.3 per cent increase on the same period last year.

The steep rise in company collapses was blamed on a “toxic combination of markedly slowing demand, elevated input costs and very tight credit conditions”.

Despite yesterday's surprise 1.5 per cent cut to the UK interest rate, the Insolvency Service expects that more businesses will go under in the coming months.

It said: “Although lower energy and commodity prices are easing the pressure on input costs, company liquidations seem certain to surge over the coming months, given the likely depth and length of the recession.”

At the same time, the number of people in England and Wales declaring themselves insolvent also rose to 27,087 over the period, which is a 8.8 per cent rise on the second quarter of this year and an increase of 4.4 per cent compared with a year ago.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "There can be little doubt that the marked rise in the number of individual insolvencies in the third quarter is only the beginning of the storm as recession, faster rising unemployment, higher debt levels, and more and more people being trapped in negative equity will exact an increasing toll over the coming months."

Last month, Britain entered first the stage of recession when it emerged that UK GDP had shrunk by 0.5 per cent in the third quarter, the first quarterly contraction in 16 years. The technical definition of a recession is two consecutive quarters of negative growth.

The Insolvency Service said: “We expect the UK economy to contract up to, and including, the third quarter of 2009 resulting in an overall GDP decline of 1.5 per cent. Furthermore, we expect the eventual recovery to be only gradual.”

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