Record number of insolvencies could lead to the death of ‘Zombie’ companies

Record number of insolvencies could lead to the death of ‘Zombie’ companies

Figures released this week by the Insolvency Service have shown an increase in the number of individuals who are unable to pay their debts.

Personal insolvencies rose by 11% in the three months to the end of September, compared to the previous quarter. It was also 8% higher than the corresponding period last year. This rise is mainly due to the number of individuals entering Individual Voluntary Arrangements, where a consumer agrees to pay back some or all their debt over a period of time.

GM zombie companies.png

The underlying number of company insolvencies also rose by 15% compared to the previous quarter and 14.5% compared to 2016.

 

Both sets of figures only show the number of individuals and businesses that have initiated insolvency proceedings, and not those who are struggling to meet their own debt obligations.

 

Industry figures suggest that there are many so-called “Zombie” firms, that are uncompetitive and have survived mainly due to low interest rates. As interest rates rise, and many of their own customers struggle to pay their debts, there could be a large number of insolvencies amongst the estimated 250,000 zombie firms.

 

James Sleight, a partner in Leeds-based restructuring and insolvency practitioner PKF Geoffrey Martin & Co, said “In previous harder economic climates, we have seen many more companies enter into formal insolvency procedures than we are seeing at the moment, mainly because these uncompetitive firms are now being protected by historically low interest rates.

 

However, we are starting to see a tougher economy for most, driven by higher rates of inflation and falling real wages, which impact on consumer spending. Together with a rise in interest rates, this may trigger a wave of these zombie companies coming forward to seek help to restructure their debts or closing down their operations.

 

This does correlate with an increase in restructuring activity at the moment.  This may be driven by these external influences such as cost inflation or perhaps due to an underlying benign creditor culture companies are simply trying to combat the future uncertainties facing them by getting their debt manageable and businesses in order now before perceived harder economic conditions prevail.”

 

PKF Geoffrey Martin & Co is a leading advisory boutique formed in Leeds in 1983, offering practical advice concerning financial distress, contingency planning, and insolvency to a business’s directors, owners, investors and financiers at all stages of its life cycle.

James Sleight is a partner, and head of the Leeds office, of PKF Geoffrey Martin & Co.

For further information, please contact James Sleight on 0113 244 5141.

Insolvency Statistics are taken from the Insolvency Service’s Insolvency Statistics – July to September 2017 (Q3 2017)

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

 

Tags: