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East Anglia: Insolvency body R3 warns of renewed increase in the number of ‘zombie’ firms

PUBLISHED: 13:13 07 January 2014 | UPDATED: 13:13 07 January 2014

Shay Lettice of Peters Elworthy & Moore, east region chairman of R3

Shay Lettice of Peters Elworthy & Moore, east region chairman of R3

Roger Adams Photographer 2011

The number of “zombie” businesses those only able to pay the interest on their debts – has risen sharply in the East of England over the past six months despite the upturn in the economy, according to a report by insolvency trade body R3.

The total of around 23,000 businesses in the region which are keeping up with interest payments but unable to reduce the amount they owe remains well down on the figure of 55,000 recorded 18 months ago but is now around double the level in R3’s last survey in the middle of 2013.

The research also shows a six month rise from 5,000 to 15,000 in the number of businesses in the region saying they were negotiating payment terms with creditors, although again this represents a decrease of 11,000 compared with 18 months ago.

Meanwhile, the number of local businesses in the region reporting that they would be unable to keep up with their debts if interest rates were to increase now stands at around 20,000.

R3 eastern region chairman Shay Lettice said zombie businesses were the chief beneficiaries of the “relatively benign” trading environment of recent years, characterised by low interest rates and forbearance on the part of many lenders, which had resulted in a smaller number of corporate insolvencies compared with previous recessions.

“Although the number of businesses showing ‘zombie’ characteristics has fallen in the long-term, there hasn’t been a corresponding rise in corporate insolvencies, which is encouraging,” he said.

“Many businesses that were struggling 18 months ago will have used the unexpected grace period between recession and recovery to put their house in order, allowing them to spring back to life.”

However, Mr Lettice, a partner at Cambridge accountancy firm Peters Elworthy & Moore, said that Zombie businesses which did not manage to recover their footing were bound to fail at some point, perhaps as their reserves became depleted or as their creditors ran out of patience.

Another possible factor behind the recent increase in zombie businesses was the adoption by HM Revenue & Customs of a “real time” approach to gathering information, which could also be putting more pressure on some firms.

“The increase in organisations having to negotiate payment terms with creditors, combined with the relatively large number worried about struggling should interest rates rise, indicates that some businesses are now moving beyond ‘struggling but surviving’ into potentially dangerous territory,” added Mr Lettice.

“It’s a positive that businesses are taking action and addressing their problems by talking to their creditors and this could help stave off a future spike in corporate insolvencies.

“We could, however, see a prolonged period in which the number of corporate failures is higher than might be expected so long after a recession.”

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