Economic conditions help zombie businesses escape corporate insolvency

Published on December 1, 2015 by Crawfords Accounting

If the worst possible combination of circumstances is a ‘perfect storm’, then so-called zombie businesses on the verge of corporate insolvency in recent years have seen what might be described as a ‘perfect calm’.

The common definition of a zombie business is one with only just enough income to service the interest on its debts, without paying down the debts themselves – leaving the firm at risk of corporate insolvency if interest rates rise or market conditions worsen in any way.

However, according to figures from the Association of Business Recovery Professionals R3, the number of zombie businesses is currently at its lowest level since they started surveying this particular definition in June 2012.

At its worst in November of that year, 160,000 businesses were on the verge of company liquidation, but now that number has fallen to 69,000 – and in many cases, this is because troubled businesses have been recovered.

But what are the favourable conditions that prevented so many company insolvencies even during such a deep recession?

Low interest rates are likely to have been crucial to those firms with substantial debts – and R3 admits that when the Bank of England base rate dropped to its historical low, nobody could have predicted how long it would remain there.

At the same time, international wholesale oil prices have dropped, helping to lower business energy bills and fuel prices for those companies with a fleet of vehicles to operate.

The pound has been in a relatively strong position as well, with benefits for firms that trade internationally or have some other exposure to foreign currency and exchange rates.

R3 president Phillip Sykes said: “The economic climate is rewriting the rules of recovery as we knew it. We are now seeing more companies able to afford to pay off the debt itself and not just the interest.”

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