Zombies lurk in latest insolvency stats

The latest official figures show company insolvencies are decreasing. But HMRC and bank policies are holding back some ugly surprises, warns CBW corporate recovery director Carl Bowles.

Statistics published by the

Insolvency Service

on the 4 February show a decrease in corporate insolvencies, confirming the findings of research published two days before by Baker Tilly showing that administrations fell by 24% across England in Q4 2010 compared to Q4 2009. London and the South East saw the most dramatic decline with a drop of 37% and the rest of England saw administrations fall by 14%.

The peak of corporate insolvencies since the credit crunch was in the winter of 2008-2009. This significantly contrasts with the last recession, when the rate continued to climb after the recession ended. Why is there such a difference this time around? And is it safe to assume we are now out of the woods?

I would say there are three principal reasons why corporate insolvency numbers are lower than would be expected of the current stage in the economic cycle: the policy of HMRC; the attitude of lenders; and low interest rates.

HMRC's Time to Pay arrangements were introduced by the government at the start of the recession to support struggling business by allowing them to defer their tax payments. More than 200,000 businesses have subscribed to the scheme, which has been a lifeline to many companies to see them through. To some degree HMRC has acted akin to a bank in the times of restricted lending. However there are a significant number of marginal companies that are not, in fact, viable going concerns. These "Zombie companies" have relied on this support to continue to trade. It is inevitable that when this support is withdrawn these zombies will be laid to rest. Recent indications reported by the

Daily Telegraph

and

AccountingWEB.co.uk members

suggest that the time of their doom may soon be approaching.

Continued...