Back in mid-2007 when the recession was first mentioned, many thought that there was going to be a significant rise in insolvencies. We are now approaching the end of 2012 and there are some signs appearing that indicate the end of the recession is close, so statistics don’t seem to reflect those initial 2007 thoughts, or should they?
The professional body of insolvency, R3, has recently stated that there may be as many as 146,000 businesses in a Zombie state. These companies are teetering on the brink of insolvency. They seem to be able to survive, not quite failing and certainly not thriving. They are just about able to pay the interest on their debts but find it a struggle to pay off any of the capital. About 8% of UK
HM Revenue & Customs introduced time to pay agreements. Interest rates were lowered and remain low. Banks have been reluctant to force the issue and call in their debts. This is the cause of the Zombie phenomenon. But the danger is a sudden change of circumstance – a rise in interest rates, an increase in supplier costs or the loss of a major customer. Any of these changes, or similar, will tip the Zombie company over the edge, probably into insolvency.
So what are the main features that define a Zombie company? Here are some; 1 – the need to negotiate and renegotiate payment terms with suppliers; 2 – a daily struggle to pay debts as and when they fall due; 3 – paying the interest on debts but not the capital, and 4 – the distinct possibility that they would be unable to service debts at all should interest rates rise.
A Zombie company has more reason than most to be worried about the economic future. Sometimes there’s no point in trying to avoid the inevitable.
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