Big fall in zombie businesses as firms negotiate with creditors

By January 20, 2014Finance, News

The number of ‘zombie businesses’ in the North of England has fallen to under 3,000 from a peak of 24,500 in November 2012, according to research by R3, the insolvency trade body.

The figures show that ‘zombie companies’ – those only able to pay the interest on their debts – now account for fewer than 1 per cent of Northern businesses, down from 9% in 2012. However there has also been a significant rise in the number of businesses negotiating with creditors, indicating that many are now being forced to address their problems.

Jeremy Oddie, North West chair of R3 and also head of recoveries at accountants Mitchell Charlesworth, says: “Many struggling businesses will have used the unexpected period of grace 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.”

The research shows 12 per cent of companies are having to negotiate with creditors – up from 3 per cent in 2012 and equivalent to 40,000 businesses. Meanwhile 1 per cent said they would be unable to pay their debts if interest rates rose.

Jeremy Oddie adds: “While It’s positive that businesses are taking action and talking to their creditors, unfortunately, successfully negotiating new payment terms that work for both the creditor and debtor isn’t always possible.

“Whereas ‘zombie businesses’ can keep going for the time being, businesses in this situation are approaching crunch time. Whether or not there is an insolvency ‘spike’ still to come depends on the fortunes of these companies and those who would be unable to pay their debts if interest rates were to rise.

“A genuine ‘spike’ in insolvencies may now be unlikely, but there could well be a prolonged period where corporate insolvency numbers are higher than they might typically be, so long after a recession.”

Corporate insolvencies ordinarily peak after recessions due to added creditor pressure and the initial strain of expansion. However, corporate insolvencies peaked during – rather than after – the last recession. A stuttering recovery, government support schemes, creditor forbearance, and low interest rates have helped keep otherwise unviable businesses (‘zombie businesses’) afloat.

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