We’ve been tracking the phenomenon of ‘zombie companies’ for some time now and we were pleased to read recently that R3, the insolvency trade body, reported that the zombie population fell during 2013.
‘Zombie companies’ are those which are only able to cover the payment of interest on their debts, neither failing or prospering, merely surviving until the balance is tipped one way or the other.
At the height of the problem in the November 2012, ‘zombie companies’ topped 160,000, now they have settled at 103,000, around 6% of UK business with a turnover of over £50,000.
In autumn 2012 insolvency numbers themselves were historically low for a recession with a much smaller than expected number of businesses entering administration and liquidation. This was attributed to these ‘zombie companies’ as they tried to cling on through a rough and hostile financial climate.
Focus Insolvency Group’s Managing Director and Chief Insolvency Practitioner commented on the dire situation at the time,
“Whilst on the face of it lower Insolvency figures look good, the increase in zombie companies is a worrying factor. Whilst the results show that measures put in place by the Government to help businesses like HMR&C’s ‘Time to Pay’ agreements; and record low interest rates have worked to keep businesses alive, some of these businesses are surviving simply because the inevitable hasn’t happened yet. In the long run debts must be paid and interest rates can’t stay at 0.5% forever. If a company cannot pay its way then a restructure is necessary or it will inevitably be wound up in due course.”
It was predicted that as the economy began to grow again there would be a rise in insolvencies as the non-viable companies were pruned away. Although we have seen the expected drop in ‘zombie companies’ over the past year, we haven’t yet seen the expected rise in corporate insolvencies.
Liz Bingham, president of R3, commented:
“While we have seen ‘zombie business’ numbers fall and stabilise, there hasn’t been a corresponding rise in corporate insolvencies. Encouragingly, many struggling businesses will have used the unexpected grace period between recession and recovery to put their house in order, allowing them to spring ‘back to life’.”
“However, our research also shows thousands of businesses moving beyond ‘struggling but surviving’ into potentially dangerous territory.”
Recent R3 research shows a record 166,000 businesses who say they are negotiating payment terms with their creditors and a further 96,000 businesses who say they would be unable to repay their debts if there were to be a small rise in interest rates.
While it is good to see companies talking to their creditors rather than ignoring the problem, these are the ones in danger of spiralling into insolvency as they can no longer keep their heads above water. We may not see the typical ‘spike’ in the insolvencies as there has been following previous recessions, but that may now be down to the fortunes of these businesses in the danger zone. The resulting trend may be a prolonged period of increased insolvency figures as those that can’t hold on any longer slowly drop away.
Do you have client’s with ‘zombie companies’? We can help, Focus Insolvency Group are licensed insolvency practitioners and are able to offer free impartial advice to business owners and individuals alike, contact us today.