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‘Zombie’ companies just refusing to die

Using the definition of a company that has liabilities exceeding assets by at least £5,000, the number of such ‘Zombie’ companies has risen by 219% since 2009.

Comparing like for like financial status of businesses and using the same definition the number of ‘Zombie’ companies in 2009 was 109,383, but by October 2014 that number had increased to 339,000.

The cash value total amount of ‘negative equity’ for these companies is now almost £72 billion, up from £69 billion last year.

The figure is currently 231 per cent higher than the combined cash deficit in 2009, which was only £31 billion.

To put these numbers into context, the total ‘Zombie’ deficit is almost twice the government’s entire defence budget, three quarters of education spending and over half of expenditure on health.

A sector breakdown of those struggling, includes retail at 21,373 zombies, or 9 per cent and construction at 26,223 zombies, or 11 per cent.

The worst hit are media and business services companies, which make up 37 per cent, or 88,832 companies.

These bare facts may help explain some larger macro economic indicators, including an increasing budget deficit blamed on lower than expected tax receipts, high employment and poor productivity.

It would appear to follow that, if there are increasing numbers of loss making business staying alive in the economy, unemployment will not necessarily increase significantly, but productivity levels will be poor and tax receipts will fall, or at least not meet expectations.   

Retail and construction are industries experiencing thin profit margins and strong downward price pressures, a problem no doubt exacerbated by the continued survival of so many uncompetitive players discounting to maintain cashflow at the expense of profitability.

These figure from ‘Company Watch’ were issued only two weeks after the insolvency statistics for Q3 2014 were published by The Insolvency Service, which showed a drop of 13.4 per cent in the number of companies filing for insolvency compared to the same quarter in 2013.

The Zombie phenomenon has led to the coining of a new expression, instead of referring to ‘creditor forbearance’, we are now referring to company directors adopting a ‘delay and pray’ strategy.

Asking the question of why Zombie companies are able to survive, offers two responses:

  1. Creditor forbearance – it is undoubtedly true that creditors, led by the banks and HMRC, have adopted a patient attitude to debt enforcement. Rather than force a customer out of business, with the attendant writing off of the debt, it is deemed better to allow them to continue with some hope value of a recovery.
  2. The business owners / directors don’t see a palatable alternative, but to continue for as long as possible. In more buoyant times they may have been inclined to walk away from a failing business and either gain employment or start something new. At present they may think it is better to stick with something they know rather than jumping out of the frying and into the fire otherwise known as the ‘delay and pray’ strategy.

The problem for the economy is that if there are a large number of businesses staggering on, only just managing to hold off their creditors on deferred payment terms and desperate to win sales at any price, then what happens next? The legacy of the credit crunch and subsequent downturn in the economy has not been followed by the normal pruning of dead commercial wood, which typically follows a recession, ready for new growth in the spring. Without the pruning and invigoration of a dynamic attitude to business and the continuing fiscal drag of low tax receipts and poor productivity, it would appear that the pain of austerity will linger and it is difficult to see how the country can achieve the productivity and sustained growth it so desperately needs to reduce the deficit and bring an end to the numbing grind of austerity?

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