Twlight Zone for Britain’s “Zombie businesses”

While the recent news that the country has emerged from recession is undoubtedly positive for the economy, lawyers are predicting that there could be problems ahead for many companies if the banks and HMRC decide to begin taking action against so-called “zombie companies” with mounting debts that they cannot pay off.

It may seem counterintuitive but the more stable and resolute the economy, the more likely it will be for some companies to go insolvent. This is because the country’s major creditors, the banks and the HMRC, have not been taking firm action against their debtors, as Martin Cork, a specialist insolvency and debt recovery lawyer at Freeth Cartwright in Stoke, explains:

“In some ways, the recession has masked failing companies and allowed them to continue. The banks and the HMRC are currently not taking a hard line against insolvent companies. They haven’t wanted to be the ones to force the issue by rocking the boat, preferring to allow companies to keep going with a view to avoiding making the economic crisis worse. However, unless we dip back into recession again, there is a good chance that they will begin to bear their teeth.”- Martin Cork, Legal Director, Freeth Cartwright

The benign attitudes of creditors has resulted in the phenomenon of “zombie companies”, i.e. companies which are able to continue existing but not able to repay their debts. They are allowed to continue existing through hesitancy from creditors over filing for insolvency but they are not making enough money to begin addressing their debts, which means their growth is completely stunted. The New Statesman magazine estimated the number of these companies as 146,000 earlier this year, commenting that they were “running on empty”.

Many analysts believe that these companies are preventing the economy’s acceleration by acting as dead weight on the economy, taking sales from rival companies with more working capital. This could stifle the economic recovery before it has even really begun.

On a more positive note, Cork believes that the insolvency industry has transformed during the recession, with much more priority placed on the use of preventive long-term credit control approaches, rather than allowing debts to mount to a degree where there becomes a risk of insolvency. This has been a positive transformation and it has forced companies to rigorously develop the way they manage their own credit and who they give credit to, but it remains to be seen whether the same approach will continue when the economy is stronger, or whether businesses and creditors will revert to their old ways.

“We take a robust approach to credit control and debt collection, helping our clients to avoid bad debt at the very first instance rather than allowing major problems to develop. We work with our clients to develop a tough stance with their debtors and this results in a healthier appreciation to debt on all sides. It doesn’t do companies any particular favours to allow them to continue when they are in fact insolvent; it is preventing the economic recovery from getting off the ground and it is preventing creditor companies from collecting their debts.”

“In addition, we are also able to assist companies who are enduring hard economic times by negotiating with HMRC and the banks in order to find a mutually acceptable approach to debt management and other services such as assisting company directors with personal cash flow issues and debt recovery. Our approach is all-encompassing and comprehensive, tailored to our clients’ requirements.” – Martin Cork

While many companies- and not least the government- will be breathing a sigh of relief at the news that Britain has come out of recession, the full picture of the damage on many companies will not become clear until creditors begin to properly chase their debts, and that means that the banks and HMRC will have to begin taking a tougher approach.