'Zombies' skewing insolvency stats

Latest figures from insolvency specialist R3 show that the number of firms opting to be removed from Companies House - known as zombies - is increasing

Despite an overall drop in the number of companies entering a formal insolvency process, the figures could be far higher due to a rise in companies quietly being struck off from the register.

This is according to the latest figures from insolvency expert R3, which revealed the number of firms opting to be removed from Companies House has jumped by 28 per cent from 139,594 in 2010-11 to 178,996 in 2013-14.

Andrew Tate, deputy vice president of R3, said: "Ordinarily, insolvencies rise following a recession, due to problems like ‘over-trading' during recoveries or as a delayed impact of the recession itself. Since the 2008 recession, however, insolvencies have fallen."

He added: "The phenomenon of ‘zombie businesses' - businesses that survived due to the unique circumstances of the last recession but had little chance of long-term recovery - could partly explain lower than expected insolvency numbers, but falling numbers of ‘zombie businesses' have not been matched by rising insolvencies.

"It may well be that many of the UK's ‘zombie businesses' have been just removing themselves from the Companies House register rather than opting for a formal insolvency procedure."

According to the stats, the number of Creditors' Voluntary Liquidations taking place during the period fell by one per cent. Tate said that although there are legitimate cases where "striking-off" a company makes sense, it is a practice that creditors should watch out for.

"Creditors do need to keep an eye out for ‘strike-off' notifications and object if necessary," he said. "Their interests may be better served by seeing a company entered into a formal insolvency procedure instead, particularly where there may be hidden assets which could be investigated by a liquidator."

Tate added: "In formal insolvencies, creditors' interests are paramount. Insolvency practitioners will treat them on an equal basis and carry out important tasks like investigating directors' actions. Although growing faster than the number of applications, it's slightly surprising that objections to 'strike-off' applications are relatively low: it may be that many creditors aren't aware of their rights."