Halving of UK insolvencies prompts fears of 'zombie nation'

22 July 2021 Consultancy.uk 4 min. read
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Despite the continued financial crisis seen during the pandemic, the number of administrations and receiverships has plummeted during 2021. The news has left some economists fearing that companies which will not survive without government support are prolonging the inevitable, and that after the support ends the UK could see a massive spate of corporate collapses as a result.

Initially, when the coronavirus hit and the UK went into lockdown, it was predicted that insolvency practitioners would be very busy. As businesses saw customers evaporate or were forced to cease trading, weaker companies, which were carrying a lot of debt, such as Debenhams, The Restaurant Group, Intu Properties and others, knew that there was no way they were going to survive as the business was in effect ‘already on life support.’ Consequently, a wave of companies went into administration or liquidation, while more number or retailers immediately sought Company Voluntary Arrangements, as a way to rapidly cut their property costs.

Halving of UK insolvencies prompts fears of 'zombie nation'

The situation did not continue like that for long, though. The government recognised that it was facing a crisis that could cause mass unemployment and long-lasting economic damage if it did not act – so it created support systems such as its furlough scheme to help businesses pay wages and other costs amid the lockdown. Initially these measures were expected to end in the summer of 2020, then in the autumn of the same year – when they were once again extended due to another spike in Covid-19 cases.

For some time, then, there has been speculation about how the situation will play out going forward. For more than a year, experts have written about what they think will happen when government support schemes start to unwind, and how many ‘rescued-by-government-support’ will actually remain afloat when support is taken away. Now, a new study from insolvency specialist Interpath Advisory has warned that the UK economy may have become flooded by ‘zombie companies,’ which will hamper its recovery in the coming years.

Analysing notices in business paper The Gazette, Interpath Advisory found that a total of 301 companies fell into administration or receivership from January to June 2021 – down from 655 in the first half of 2020 or 686 in the same period of 2019. The fact that during its deepest recession in three centuries, the UK is seeing fewer insolvencies, suggests the £80 billion of emergency government-backed loans received by UK businesses during the Covid-19 crisis have kept a huge number of firms on life-support.

Commenting on this, Blair Nimmo, CEO of Interpath Advisory, suggested that “insolvencies are being supressed artificially thanks to the raft of support available,” and that as a result, there was growing concern in some quarters “that the taxpayer is propping up an army of zombie companies.” However, he was also keen to add that “there are lots of good businesses out there whose balance sheets are broken solely due to the impact of the pandemic – so it is only right they continue to be given the time and the support to be able to build their way back out of the crisis.”

In this case, Interpath is anticipating a modest rise in insolvencies in the coming months – but not necessarily at the rate some experts might be forecasting. As the Job Retention Scheme and other support measures unwind, a number of ‘zombie companies’ will have to face up to some harsh realities – but many more businesses will be given time and space to recover, as Nimmo asserted, “all stakeholders, including banks and HMRC, [will] continue to be pragmatic in their approach to companies experiencing difficulties as a consequence of the pandemic and there is lots of cash available from investors ready and waiting to be deployed.”

Of course, that road to recovery will not be easy. Issues such as labour and raw material shortages and rising costs continue to weigh heavily on many. Meanwhile, organisations will need to weigh up how and when to repay pandemic-related liabilities, and how this will affect the road to recovery is being exacerbated by raw material and labour shortages, as well as rising inflation. With that being said, increased demand from consumers as restrictions lift may also allow businesses to raise prices, before the effect of higher input costs are felt – providing a much needed boost in profits and cashflow.

“Enormous credit must be given to business leaders who on the whole have navigated their businesses well during one of the most challenging periods in corporate history.” Nimmo concluded, “It would be easy to assume that we have reached the bottom of the cycle and that insolvency levels will start creeping back up again during the second part of the year… This may well be the case, albeit I’m personally not so sure cases will escalate rapidly… While insolvency practitioners will inevitably get busier, I don’t think we will see the deluge of corporate failures that many have predicted.”