Is the game up for Zombie companies?


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We find ourselves in times of great economic uncertainty, with the Bank of England anticipating that inflation will peak at 11% in October (notwithstanding the energy price guarantee) and that GDP will further decrease by 0.1% in the third quarter of 2022 as the UK economy heads towards recession.

It is against that backdrop that we have seen interest rates increased to 2.25% (the highest we have seen since 2008) and controversial tax cuts introduced by Chancellor Kwasi Kwarteng, with the 45% rate abolished and both the basic income tax rate and stamp duty rates being decreased.

Whilst this has been done with the intention of stimulating growth, economists remain divided as to whether or not any marginal gain will be offset by the rising interest rates and the financial markets have reacted accordingly.

Overnight, the Pound reached an all-time low against the Dollar ($1.035) and the markets are now pricing in an emergency interest rate increase of 0.75% to 1.5% ahead of the Bank of England's next meeting in November. Previous longer term interest rate projections have been revised upwards, with the cost of borrowing anticipated to be as high as 6% by May 2023.

The worsening financial landscape, which is only exacerbated by the longer term impact of Brexit, COVID and the very immediate supply chain and cost of living crises, means that thousands of companies find themselves in significant distress.

Between 5 March 2009 and 3 February 2022, the Bank of England base rate was kept at or below 0.75% which enabled a huge swathe of companies to incur significant indebtedness at a rate that was then relatively easy to service. This has enabled companies that arguably should have been forced into insolvency a long time ago to stay afloat, simply by repaying the interest due on the capital outstanding.

Those companies are now feeling the strain on cashflow and the situation will only become more untenable in the event that interest rates continue to increase. A number of those companies will of course also have taken advantage of the Government's Bounce Back loan scheme which will only be adding pressure on their ability to remain solvent.

It seems inevitable that we will see a marked increase in corporate insolvency and indeed that is reflected in the Government's most recent statistics. In August 2022 alone, there were 33% more creditors' voluntary liquidations that in August 2021 and 73% more than in August 2019. There were four times more compulsory liquidations than in the same period for 2021 and more than double the number of administration cases.

In light of the above, one can only assume that this trend is likely to continue.

If you, or your customers or suppliers, are facing financial difficulty then please contact Katie Farmer or Dan Butler. As always, it is better to get advice as soon as possible when insolvency becomes a consideration and directors should be mindful of the duties they owe to the company in ensuring they take the appropriate action at the right time.

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