Published on 5 August 2011 by Tony Groom

The latest Insolvency Stats published on Friday suggest that Zombie Businesses are holding back the UK Economy, says company doctor Tony Groom, of K2 Business Rescue.

A summary of the Q2 2011 UK insolvency statistics shows: Compulsory Liquidations up; Voluntary Liquidations down; Administrations down and CVAs static.

Compulsory Liquidations up on last quarter and on the same quarter last year: 1,325 in Q2 2011, 1,111 in Q1, 1,185 in Q2 2010

Voluntary Liquidations down on last quarter but similar to the same quarter last year: 2,951 in Q2 2011, 3,186 in Q1, 2,909 in Q2 2010

Administrations down on last quarter and down on the same quarter last year: 695 in Q2 2011, 782 in Q1, 777 in Q2 2010.

Company Voluntary Arrangements similar to last quarter but down on the same quarter last year: 187 in Q2 2011, 183 in Q1, 232 in Q2 2010.

Set against a background of slowing growth over the last three quarters at 0.5% from January to March, 0.2% for the second quarter and contraction of the UK economy by 0.5% in the fourth quarter contraction of 2010, Groom suggests that the picture of what has been going on is becoming clearer.

Groom, unlike most insolvency and turnaround practitioners, does not believe that his firm will soon be busy restructuring the large number of over-leveraged businesses.

He believes that businesses are putting off restructuring and will do so for as long as possible, at least while the economy is uncertain. Historically insolvencies have increased during the upturn after the bottom of a recession, when business prospects can be predicted. Right now it is not clear if we have reached the bottom and if  there will be any growth, let alone how much, or if the market will flatline for some time.

As an example, compare liquidation figures for the mild recession of 2001-2002 with the recent recession, already referred to as the worst since the Great Depression of the 1930s. The total number of liquidations for each year was: 2001:14,972, 2002:16,306, 2003:14,184, 2004:12,192….2007:12,507; 2008:15,535; 2009:19,077; 2010:16,045. These and the figures for 2011 would imply that we are coming out of a very mild recession, which is plainly not the case.

One set of figures, the increase in compulsory liquidations, does indicate a level of frustration over companies not taking action to deal with their debts. Creditors are becoming impatient with directors who are putting off restructuring and starting to force their hand by issuing a winding up petition. But even these figures are very low, possibly because creditors know they won’t receive a dividend if the business is wound up.

The tragedy is that without restructuring, a great many businesses, so called ‘Zombie companies’, lack optimism through being unable to plan for the future. They have run down their stock levels, cut staff to the bone, do limited marketing, are not investing in capacity and are certainly not looking for growth opportunities let alone looking abroad and are not laying foundations for their future.

The lack of optimism is resulting in quality and service levels being in decline and as a result they are holding back economic recovery because they are not investing in it.