Insolvency statistics released on the 3rd May show the number of company failures continues to fall. Does this mean that the recession is finally over for UK companies?
- Fewer company failures despite predictions
- Do Zombie Companies really exist?
- Other reasons for UK company survival
Fortunes of UK companies improve
Business seems to be booming again for some of the UK’s companies. Shell recently posted profits for quarter 4 2012 of nearly £5 billion. Today HSBC reported a profit of £5.4 billion for the first quarter 2013.
Overall UK companies seem to be in pretty good shape. In Q1 2013 the number of companies that went into liquidation fell 5% compared to Q4 2012. The number fell nearly 16% compared to the same quarter 2012. The number of companies that started a Company Voluntary Arrangement fell by nearly 20% compared with Q1 2012.
Insolvency experts remain puzzled by these figures. However perhaps they are overlooking the possibility that many companies may actually be in pretty good shape.
Are the called Zombie Companies alive?
Company failures peaked in 2009 after the start of the UK recession. However since that time the number has fallen overall. This situation has constantly puzzled insolvency experts. Given continuing stagnation in the economy many predicted the number of failures would remain high.
To explain the falling number of failures experts have seized upon the idea that many companies are so called Zombies. These are organisations which were clinging onto life by the grace of the bank manager. Banks are reluctant to call time on them despite being in arrears. This is because closure is not likely to result in the repayment of debts owed.
But as profitability figures continue to disprove this theory we now have to consider another explanation. Large numbers of UK companies actually took steps to cut costs and realign themselves to the new market conditions. Those companies are now lean and increasingly profitable. They may not be growing massively which would explain the static GDP figures. But they are very much alive and making money.
An indicator of increasing company profitability is the recent stock market rally. Stock markets in the UK are at nearly the highest level for 2 years. Investors have their eye on dividends which are paid from company profits.
Other reasons for low Company Failures
It seems clear that many companies have reacted well to the recession. However I believe there are many cases where company failures have been prevented by other factors. Creditors such as the banks are worried about forcing companies to close. Such action in many cases would leave them little possibility of any kind of return.
HMRC has also been under pressure to help struggling companies. Where possible it is helping them manage tax and VAT arrears with its Time To Pay scheme.
Low interest rates have also come to the aid of some businesses particularly those that own property supported with mortgages.
I believe it is a combination of the above factors that has helped many companies remain in good shape. Many of these remain cautious and not yet willing to invest significantly. As a result there are still relatively few new permanent jobs being created. However the companies are profitable and are not in any immediate risk of closure.