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August 09, 2013

'Zombie businesses' hide true insolvency picture

According to figures published by The Insolvency Service (TIS), there were 3,978 compulsory liquidations and creditors' voluntary liquidations in England and Wales in the second quarter of 2013 (on a seasonally adjusted basis), an increase of 10.5% on the previous quarter, but 2.1% less than the same quarter a year ago.

This was made up of 961 compulsory liquidations (down 6.6% on the previous quarter and down 6.5% on the corresponding quarter of 2012) and 3,017 creditors' voluntary liquidations (up 17.3% on the previous quarter but down 0.6% on the corresponding quarter in 2012).

There were a further 974 "other corporate insolvencies" in Q2 2013 (not seasonally adjusted), "comprising 192 receiverships, 622 administrations and 160 company voluntary arrangements [CVAs]" reported TIS. In total, these "represented a decrease of 25.6% on the same period a year ago, though the scale of this decrease is influenced by the unusually high number of CVAs in the second quarter of 2012".

Dan Butters, restructuring partner at (professional services firm) Deloitte in Leeds, said: "We hold our breath to see how recent positive data and renewed confidence actually translates longer term into the business recovery space – clearly this will take time.

"A key challenge to businesses is being able to fund expansion as any recovery gathers momentum. This could be an insurmountable challenge for the most extreme cases of 'zombie businesses', those unable to invest or expand, and which have so far avoided formal insolvency procedures."

Also responding to the figures, Andrew Hosking, national head of lender services at professional services firm RSM Tenon, said: "Despite a slight uplift in corporate insolvency in Q2 2013 compared to Q1, the number of corporates in insolvency has remained around 3,994 per quarter in the past 18 months.

"However, the true picture is being masked by the high volume of 'zombie' companies – those who are just about able to pay the interest on debts, but not reducing the debt itself or those who are struggling to pay creditors."

RSM Tenon estimates that more than 200,000 companies are currently at "high risk of insolvency" – an increase of 3% compared to the same period in 2012.

Industries that rely on "discretionary spending", such as retail and hospitality and leisure, continue to suffer and will be hoping for cause to be more confident in the second half of the year, said RSM Tenon.

It noted that retail insolvencies are up by 13% on the previous quarter and a 5% increase from the comparative quarter in 2012. "There remains little movement in the hospitality and leisure industry, which continues to represents approximately 10% of all corporate insolvencies.

"The industry with the highest number of corporate insolvencies continues to be business services (23%), with construction the second highest (16%) and hospitality and leisure third (10%)."

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