Zombie firms apocalypse facing the Scottish economy
October 21, 2021
As the full effects of the Coronavirus pandemic began to be felt in March 2020, many anticipated a significant rise in formal insolvency appointments as companies grappled with the difficulties of unprecedently severe business disruption, as revenues plunged and whole swathes of businesses were forced to close for extended periods.
The insolvency and restructuring industry braced itself for an increase in work not seen since the financial crisis in 2008. Fortunately, thanks in no small part to the Government support measures put in place, but also to the astonishing resilience of Scottish entrepreneurs, this increase has not yet materialised.
In fact, 2020 saw the lowest number of insolvency appointments since 1989 and industry predictions of increased volumes have been repeatedly pushed back as the pandemic and corresponding support measures continued. There’s little doubt the Government has succeeded in ‘flattening the curve’ of financial distress.
Businesses and insolvency in 2021
Yet as the country continues to reopen and support measures are withdrawn it appears a business failure spike may be just around the corner. The final elements of furlough were withdrawn at the end of September. The following day the ban on Winding Up Petitions was lifted (subject to a minimum debt threshold of £10,000 and excluding commercial rent arrears) and creditors allowed to pursue payment via the courts in a much more aggressive manner.
In addition, as repayments fall due on the £4.1bn of Bounce Back Loans and CBILS taken up by almost 100,000 Scottish businesses and as HMRC starts taking a less laid-back approach to collecting arrears of VAT and PAYE, many struggling companies may begin to find themselves squeezed by a number of factors.
The high proportion of zombie firms in the UK, those that do not record a profit or contribute meaningfully to the economy, has been widely reported to have increased during the pandemic. A report by the thinktank Onward in April 2021 estimated as many as 20% of companies meet this classification, an increase from 16% prior to the pandemic.
Data taken from financial health monitoring specialists Company Watch shows that the position in Scotland is stark:
- There are 10,904 Scottish companies with liabilities exceeding their assets by at least £20,000
- A year ago, only 7,408 of them were in this position
- There has been a dramatic 47% increase in the number of zombie firms
The impact of zombie firms on solvent businesses
Their combined ‘negative equity’ amounts to £3.2bn and their total debts are £8.2bn. They have total assets of £14bn, which is a dead weight of unproductive business capacity dragging down healthy commerce, distorting competition and limiting investment in other businesses with the ability to thrive and create jobs and wealth.
These companies may struggle to recover from this position once support measures and protection are withdrawn and a cliff edge looms large for a number of Scottish companies from the beginning of October. Even before this, company insolvencies across the UK were already on the rise, with August 2021 figures showing a 23% increase on July 2021 and a startling 71% on August 2020.
Corporate failure isn’t certain
Corporate failure isn’t however a certain consequence to these difficulties and companies in financial distress may still be able to resolve their position by taking early advice from an experienced business rescue expert. Much will depend on the stance taken by HMRC and other creditors and how pragmatically they approach overdue debts.
There will be a range of options available for distressed companies, but the main considerations will be the need to keep a tighter than ever rein on cashflow controls and to assess the likely market in their specific industries. If future trade is anticipated to be positive this may enable companies to reach appropriate plans to deal with their historic debt and recover from their zombie status.
How can we help?
If you are facing financial difficulties following support measures being withdrawn it is important to take early advice from a licensed insolvency practitioner whilst restructuring options are possible.
A consultation can be arranged. Our ethos is to engage with those facing difficulties with a constructive and positive attitude. Contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.