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How long will zombie companies be tolerated?

A specialist lawyer has warned that the increasing number of ‘zombie companies’ operating could lead to a surge in insolvency cases if HMRC and the banks start to take action against companies that are unable to pay their debts.

According to a recent study by R3, which we reported on last month, there are around 160,000 ‘zombie companies’ in the UK today – those who can only afford to pay the interest on their debts.

Although the number of insolvencies has actually decreased in recent quarters, experts believe that this is because creditors are unwilling to take action against such companies during the current economic climate. Should the economy improve, however, one expert believes that things will change significantly.

Martin Cork, a specialist insolvency and debt recovery lawyer at Freeth Cartwright, said that the recession has ‘masked’ the problem of zombie companies – with HMRC preferring to allow failing companies to continue trading for the fear of making the economic recovery even weaker.

“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.”

Cork says that the insolvency industry has been transformed as a result of 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 approach is aimed more at preventing clients from becoming burdened by debt in the first place.

Only when the economic climate improves will we know whether HMRC and creditors will pursue insolvent companies with renewed vigour, or whether the more tolerant approach to zombie companies will be sustained.

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