James Stares, Southern Regional Chair of insolvency trade body R3 and director at Grant Thornton in Southampton says:
“Blockbuster followed HMV, Comet and Jessops into administration this week – another big name casualty of the growing crisis besetting retailers. The UK High Street is experiencing wholesale changes with unsettling consequences for employees. However, it does offer an important opportunity to reallocate capital.
“Corporate insolvency rates remain historically low, especially when contrasted with previous recessions and periods of recovery. Low insolvency rates are good for employment, which is a key concern following the many retail administrations. Our flexible insolvency regime has allowed many insolvent retail businesses to emerge from administration with some jobs or stores intact, typically about half the jobs and stores have survived in 2012.
“However, while businesses exist in distress and corporate insolvencies remain low the economy continues to stagnate. A healthy economy requires activity at both ends of the economic cycle – it needs business growth and expansion, as well as the recycling of capital following business failure.
“R3 research reveals there are 160,000 zombie businesses in the UK; that is businesses only able to pay the interest on their debt but not the debt itself. These businesses are being kept alive by the forbearance of banks, other key creditors and favourable interest rates, which is enabling them to stay afloat but make no in-roads on their debt. One in ten retailers are also currently existing as ‘zombies’.
“The big retailers who we have recently seen enter administration were well known to have been in a precarious situation for some time, with the Christmas and January trading periods as their last chance.
“A stagnating economy ties up capital that could be used for other, healthier businesses. Struggling retailers that have entered insolvency may enable the economy to return to growth and may be a sign of what is to come. At the end of the previous recession, an increase in corporate insolvency did clear the ground for a quicker return to growth, however this hasn’t happened this time. We do not need to ‘cull’ the zombies all at once, but we do need to be honest and realistic in establishing a ‘tipping point’ where resuscitation is impossible, and take action accordingly if we are going to secure long term growth.”
