trigroupadmin No Comments

Throughout the last few years of economic difficulty the number of company insolvencies has remained remarkably low. Given the depths of the recession – the deepest for generations – the assumptions of some sort of “insolvency boom” seem to have been misplaced.

Yet if the economy has been, at best, flatlining (despite recent weak, albeit consistent and sustained, improvements) and the number of company insolvencies is low, then the logical conclusion must be that the number of so-called zombie companies – businesses that survive but are able to meet only interest, but not capital, payments – is growing. Some companies are surviving at the very edge of serviceable debt levels, a point emphasised by the House of Commons Business, Innovation and Skills Select Committee in a recent report.

Too many zombie companies poison the economy. Suppliers, lenders, customers and anyone else who deals with the company may not know that the company is just one invoice away from being unable to meet its debts, and there is little real protection for business partners when zombie companies are allowed to continue to trade. The purpose of the company insolvency regime is to clean up the market by patching up and rescuing failing businesses and putting basket-case companies to bed. Businesses treading the tightrope of going out of business should address the issues rather than carrying on regardless.

The Association of Business Recovery Professionals (known as R3) has commissioned research on the phenomenon. According to its most recent report, there are about 108,000 true zombie businesses, and another 69,000 would be unable to pay their debts if there were to be even a small increase in interest rates. Some 134,000 companies admit to struggling to pay debts as and when they fall due (and are therefore technically insolvent under section 123 of the Insolvency Act 1986), and another 137,000 are having to negotiate payment terms with creditors.

As the Select Committee found, the growth of zombie businesses has probably been prompted by the low value of assets at present. Additionally, lenders and creditors have been generally fairly sympathetic and have been content to agree payment terms and even to forgive certain debts. But as asset values improve creditors may start to consider that now is the time to chase their debts, particularly since they may need the cash flow in order to support their own sales growth in an improving economy. That, in turn, may lead to an increase in company insolvency rates.

So what should you do if your business is struggling? Certainly, don’t bury your head in the sand and hope everything will turn out alright. It’s vital to seek advice sooner rather than later – preferably as soon as problems start to emerge. The earlier that insolvency advice is taken the more options that are likely to be available and the greater the prospects of a successful corporate recovery. We’ll work closely with the directors and management. We always start with the objective of saving businesses but, where that is not possible, we’ll help ensure that the liquidation process runs smoothly.