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‘Zombie companies’ on the increase

According to the trade body for insolvency professionals, there are 160,000 ‘zombie companies’ live in the UK – these are companies who can only afford to service the interest on outstanding debts, but not repay the debt itself.

R3 claims that 14,000 new ‘zombie companies’ have been created since June this year, with the current total representing 9% of all UK businesses.

Lee Manning, Chairman of R3, explained that the term ‘zombie business’ has been used fairly widely, although the correct definition of the term applies to a company that can only repay the interest on on a loan. Manning said that the term should also be used for companies who are “currently over-geared and cannot pay back the debt in full.”

The Bank of England recently said that such zombie companies were one of the causes of stagnating growth (along with several other factors). In fact, one in ten companies traded at a loss in 2010 – a far higher rate than in the mid-90’s.

Interestingly, the number of corporate insolvencies remains very low – especially in comparison to previous recessions. For example, there were 8,000 fewer corporate insolvencies in 2009 (when the credit crunch was at its peak) than in 1992.

Manning said that the low incidence of insolvency is good for employment, and the flexibility of the insolvency rules have enabled many firms to emerge from the administration process with their businesses intact.

However, traditionally the number of corporate insolvencies rises during the first stages of economy recovery – “but so far this recession is re-writing the rules.”

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