Coronavirus: 'Zombie company' warning as 557,000 firms endure significant distress

·2-min read

A closely-watched report on the financial health of UK businesses has warned of a perfect storm by the year's end for "zombie companies", with the coronavirus crisis already placing more than half a million firms on the brink.

According to the latest Red Flag Alert from insolvency specialists Begbies Traynor, an easing in government support schemes at a time of continuing COVID-19 disruption could lead to a flood of failures.

It said the current bans on lease forfeiture and winding-up petitions was masking the scale of the problem, with 557,000 companies already in "significant distress" in the last quarter of the year - the three months to September.

It marked the biggest leap in quarterly distress since 2017, the report said, with sectors showing the greatest increases of distress including hospitality, food and drugs and construction.

The cash flow crisis comes despite schemes to ease the financial burden such as Bounce Back loans and furlough wage support.

The Job Retention Scheme is to be replaced by an already sweetened Job Support Scheme at the beginning of next month while other aid available includes access to grants for businesses hit by local virus restrictions.

The chancellor was forced to bolster the generosity of his Winter Economic Plan last week amid warnings the resurgence of coronavirus restrictions risked tipping many of the viable jobs he wished to support over the edge.

Rishi Sunak is due to outline his spending priorities for the year ahead on 25 November.

Begbies Traynor partner, Julie Palmer, suggested that without additional support or extension of protections for financially crippled businesses beyond December, the insolvency rate was set to surge next year.

She wrote: "Unfortunately for the many zombie companies in existence across the UK, a perfect storm is on the horizon."

She added: "With so many businesses limping along there could be a flood of insolvencies when the courts do get back to anywhere near normal capacity and attempt to clear the backlog of pending cases.

"This in itself, combined with the end of the furlough scheme and other government support measures is likely to have a material impact on the UK business failure rate.

"A combination of a grim economic data, and very poor trading conditions, particularly in the most vulnerable sectors, such as hospitality will take its toll and this is expected to feed through to next year's first quarter, particularly when the government ends its high profile corporate life support measures."