There are a high proportion of zombie companies in the UK. The COVID-19 pandemic has created the perfect environment to create more.
The UK has had a zombie problem for some time now. Companies that simply exist, shambling onwards without ever turning a profit or contributing meaningfully to the economy. These ‘zombie companies’ have played a significant role in keeping UK productivity low and it’s only getting worse.
According to a report by the conservative think tank Onward, between 1% and 4% of companies have been ‘zombified’ since the start of the pandemic, bringing the total number in the UK to more than 20%.
Managing director of Perfection Alloys, Fraser Dick, speaks about how hard decisions and empathy from his insolvency practitioner helped his business successfully weather insolvency.
Seven years ago, vehicle refurbishment business Perfection Alloys ran into trouble. Despite a turnover of more than £2m, the company experienced a cashflow issue which resulted in entering a CVA to rescue the business.
“We were owed massive amounts of money that we were struggling to collect,” says Fraser Dick, managing director of Perfection Alloys. “And we owed a big amount to the revenue.”
The business had expanded very rapidly, starting with its two MDs, Dick and Simon Gudgeon, and growing to 55 staff in the space of three years. “We just got so busy and so large so quickly that there was no real structure. It was naivety because neither of us had run a business before,” says Dick.
According to Greg Palfrey of Smith and Williamson, we’ll see waves of insolvency this year as sector by sector, businesses feel the pinch.
Government support measures have been a lifeline for millions of UK businesses. As of February 2021, £53.8bn have been claimed under the Coronavirus Job Retention Scheme (CJRS), furloughing 11.2m people. Over 1.5m businesses have received loans worth over £74bn, including future fund loans, business interruption schemes and bounce back loans.
But, says Greg Palfrey, Partner and National Head of Restructuring & Recovery Services at Smith & Williamson, while being hugely supportive, these measures have also kept large numbers of struggling businesses artificially afloat, therefore prolonging the inevitable. It’s why we haven’t seen spikes in firms going into insolvency – at least not yet.
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