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Drop in insolvencies down to zombie companies?

The number of companies that are becoming insolvent has fallen over the past three months, according to two recent reports. This is good news in itself, but may disguise the true picture – that many firms are hanging on by the skin of their teeth, and the good-will of their creditors.

The first report, from Pricewaterhouse Coopers (PwC), reveals that there were 3,285 insolvencies in the first three months of 2013. This is down from 3,657 in Q4 2012 and down on the 4,412 firms that went bust in the first quarter of 2012.

Speaking to the Financial Times, Mike Jervis, restructuring partner at PwC, said “We are in an environment where lenders want to avoid losses, so if companies do not need new cash they are going to be supported even if they are insolvent in balance sheet terms.”

In effect, this may be leading to a large number of zombie companies – businesses that are only able to pay the interest on their debt but not the debt itself.

Research published by insolvency trade body R3 in November revealed that there were 160,000 zombie businesses in the UK – an increase of 10% on the number of business owners who said in July 2012 that they were only servicing their interest.

However, the second new report, from information services company Experian, takes a more positive spin. It shows that insolvency rates among businesses with 101 to 500 employees has fallen for the third consecutive month – from a peak of 0.19% in November of 2012 to 0.09% in February 2013.

Max Firth, Managing Director, Experian Business Information Services, UK&I, described the overall lower level of insolvencies as “encouraging to see”. “Much has been made of the argument that low insolvency rates are in part due to ‘Zombie businesses’ – weak firms unable to do more than survive and pay off the interest on their debt,” he said. “Many of the weaker businesses failed during 2008-2009 when insolvency rates were high and more businesses closed than started up, leading to the business population reducing by seven percent. The firms that have since survived are now more robust. Furthermore, we are once again seeing more businesses starting up than closing.”

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