Collapse of zombie firms ‘shows pick-up in the wider economy’

0
Have your say

The number of companies collapsing into administration surged to its highest level for nearly two years at the end of 2013 as a raft of so-called “zombie” firms hit the wall in the run up to Christmas.

But experts said rising company failures were a sign of a wider pick-up in the economy, with firms that have limped along in the downturn struggling to compete as the recovery takes hold.

Figures from the Insolvency Service show 642 firms called in administrators across England and Wales in the fourth quarter of 2013 – an 18 per cent hike on the previous three months and the highest since the first quarter of 2012, when the UK narrowly missed plunging back into recession.

The full-year picture was less gloomy as corporate administrations fell seven per cent to 2,365, while there was an even bigger drop of 16 per cent including receiverships and company voluntary arrangements last year.

The wider number of compulsory and voluntary company liquidations fell seven per cent to 14,982 in 2013, according to the Insolvency Service.

Ben Woolrych, partner at advisory and restructuring firm FRP Advisory, said the rise in administrations “provides evidence that the general economy is recovering”.

He said a painful, but necessary “cull in zombie businesses” was under way as firms that have failed to invest in their businesses during the recessionary years or have survived by servicing interest only bank loans struggle to compete in the new economic conditions.

He added: “Companies have been addressing their stressed balance sheets by using administration as a restructuring procedure to reposition their business model to benefit from the recovering economy.”

Record low interest rates helped keep corporate failures lower than normal during the economic woes since the financial crisis.

But Giles Frampton, vice-president of insolvency trade body R3, warned the prospect of rising rates and more buoyant wider economic conditions could put pressure on some firms.

He said: “The early stages of an economic recovery are often a lot harder for some businesses to negotiate than recessions themselves.

“Some businesses will have taken advantage of the extended gap between recession and growth to put their finances back in order, but this won’t be the case for 
everyone.”

The figures showed that company administrations across Scotland dropped 16 per cent year-on-year to 37 in the fourth quarter and was 22 per cent lower over 2013 as a whole, at 151.

There was no regional breakdown for the figures.

Mark Firmin, restructuring partner at KPMG in Leeds, said: “The sharp increase in administration appointments for the last quarter of 2013 will come as a surprise to many, running counter to the increasingly numerous positive economic indicators. It is perhaps even more surprising that the property sector, which is purportedly enjoying another boom, saw such a marked increase in administration appointments at the end of the year. The numbers should not necessarily set the hares running as history has taught us that many businesses, perhaps counter-intuitively, struggle to survive when economies pick up again as over-trading tips them over the edge. However, the numbers do represent a cautionary warning that we should not herald a full recovery just yet”.