Lawyers prepare for post-recession surge in insolvency cases

While the recent news that the country has emerged from recession is undoubtedly positive for the economy, lawyers are predicting that there could be problems ahead for many companies if the banks and HMRC decide to begin taking action against so-called “zombie companies” with mounting debts that they cannot pay off.

It may seem counterintuitive but the more stable and resolute the economy, the more likely it will be for some companies to go insolvent. This is because the country’s major creditors, the banks and the HMRC, have not been taking firm action against their debtors.

Martin Cork, Legal Director at Freeth Cartwright in Stoke, says that on some ways, the recession has masked failing companies and allowed them to continue: “The banks and the HMRC are currently not taking a hard line against insolvent companies. They haven’t wanted to be the ones to force the issue by rocking the boat, preferring to allow companies to keep going with a view to avoiding making the economic crisis worse. However, unless we dip back into recession again, there is a good chance that they will begin to bear their teeth.”

The benign attitudes of creditors has resulted in the phenomenon of “zombie companies”, i.e. companies which are able to continue existing but not able to repay their debts. They are allowed to continue existing through hesitancy from creditors over filing for insolvency but they are not making enough money to begin addressing their debts, which means their growth is completely stunted. The New Statesman magazine estimated the number of these companies as 146,000 earlier this year, commenting that they were “running on empty”.

Many analysts believe that these companies are preventing the economy’s acceleration by acting as dead weight on the economy, taking sales from rival companies with more working capital. This could stifle the economic recovery before it has even really begun.

Martin believes that the insolvency industry has transformed during the recession, with much more priority placed on the use of preventive long-term credit control approaches, rather than allowing debts to mount to a degree where there becomes a risk of insolvency.