Zombie Businessess On The Rise

According to research from the insolvency trade body R3, 14,000 new zombie companies have been created since June this year, a 10 per cent increase on the previous quarter, taking the total to 160,000 such businesses in the UK.

Zombie companies are businesses that are only able to pay the interest on their debt but not the debt itself, but according to R3 President Lee Manning, the term also extends to those companies who are currently over-geared and cannot pay back the debt in full.

Mr Manning said that the banks are displaying greater forbearance on existing debt, but when a business cannot get extra lending it will be unable to expand, leading to stagnation that ties up capital that could be used for other, healthier businesses.

However, corporate insolvency rates remain historically low, especially when contrasted with previous recessions, the R3 research has revealed. Corporate insolvencies for this recession peaked in 2009 at 25,432 for England and Wales.

This meant there were nearly 8,000 fewer corporate insolvencies in 2009 compared to 1992, and they dipped again in the last quarter, which is good for employment, whilst the relatively flexible insolvency regime in the UK has allowed many insolvent businesses, especially in the retail sector, to emerge from administration with some jobs or stores intact.

Although corporate insolvencies have traditionally tended to spike in early recovery, so far this recession is re-writing the rules, which reflects the longer period of low growth that is the new norm, with low interest rates and low liquidation rates, but with many businesses running at a loss.

Tim Close is an accountant specialising in business insolvency, debt recovery and business rescue.

Posted in News.