More firms facing insolvency, despite zombie fall

Research by the insolvency trade body R3 has revealed a sharp rise in small businesses facing insolvency, despite a fall in so-called zombie companies.

According to R3, the number of zombie companies – defined as companies that are paying off only the interest on their debts – fell to just 108,000 in May, down from 160,000 in November.

However the organisation says that more than 200,000 small businesses, with a turnover of £50,000 and above, are either negotiating with their creditors or struggling to pay debts when they fall due.

Banks say the findings are interlinked, as they are being forced to recognise their bad debts and end the practice of forbearance, which allows companies that would otherwise have gone bust to limp along thanks to a temporary change in the term of a loan and because the cost of credit is so low.

As forbearance is withdrawn, many more companies are being made to repay the principle on their debt, and as a result, are struggling to remain solvent.

The survey from R3 found that 134,000 companies were “struggling to pay their debts when they fall due” while another 137,000 were “having to negotiate payment terms with creditors” in May – a record high for both numbers.

Liz Bingham, president of R3, said: “These businesses are in a very perilous position. While they have yet to enter formal insolvency procedures, businesses with such serious cash flow problems may find that the day of reckoning is not far off.”

Forbearance and low interest rates have helped many businesses stave of insolvency, keeping thousands of people in jobs. Unlike previous recessions, the insolvency rate has been comparatively low – at just 0.8 percent, against 2.6 percent in the 1990s.

“With the number of businesses reporting severe cash flow problems on the rise, the long-awaited insolvency lag from the last recession may arrive soon.”

The team at Palmers is experienced in advising on insolvency issues and all aspects of commercial debt litigation, so if you are working with an organisation that is struggling in the current economic climate, please contact us for dedicated advice.