Tens of thousands of so-called “zombie” companies could collapse this year as increasing cost pressures and weak demand push companies to the breaking point, insolvency specialists warn.
New research from Begbies Traynor shows a sharp increase in companies in severe financial distress, with a 44 per cent increase in companies classified as being in “critical financial distress” in the final three months of last year compared to the same period in 2024.
According to Begbies’ latest Red Flag Alert report, a total of 67,369 businesses have been identified as being in critical distress. The long-running study analyzes public records such as district court rulings and company financial statements, as well as Begbie’s own financial stress scoring, to assess the continued deterioration in key financial indicators.
The hospitality sector was the worst hit after a difficult Christmas period marked by weaker consumer spending. Hotels saw a 54 percent increase in businesses showing signs of critical crisis last year, while bars and restaurants saw a 39 percent increase.
Begbies said businesses across the economy continue to “struggle with a prolonged period of economic uncertainty”, compounded by rising operating costs due to higher wages, increased interest rates, increased tax burdens and dampened consumer demand.
Julie Palmer, partner at Begbies Traynor, said the current environment was creating a growing pool of zombie companies, firms that are able to service the interest on their debt but are unable to invest, grow or meaningfully reduce their debt.
“While many of these organizations have struggled for years, we are seeing a new catalyst in 2026 that could push some over the edge,” Palmer said. “That catalyst is for HMRC to begin to claim some of the £27 billion in overdue corporation tax, payroll tax and VAT that has accumulated during the pandemic.”
She added that many of these companies would likely fail if they fail to secure new investment or be acquired by “more agile companies.”
Since the 2008 financial crisis, there have been repeated predictions of a mass eviction of zombie companies, but a dramatic increase in bankruptcies has not occurred outside of certain categories. There were 23,938 registered corporate bankruptcies in 2025, roughly the same as 2024 levels.
However, creditor voluntary liquidations, in which shareholders liquidate insolvent companies that can no longer pay their debts, have reached their highest level since records began in 1960, with the last four years accounting for the four largest annual totals.
These liquidations are commonly used by small businesses and have increased as the cost of voluntary liquidations has fallen and pandemic support measures have been withdrawn. Bankruptcy experts have expressed concerns that the process can be abused as a relatively untested route to paying off debts.
In contrast, corporate administrations, where an insolvency practitioner takes control to save the company or achieve a better outcome for creditors, fell 6 percent last year compared to 2024. Governments are often seen as a better barometer of the general economic situation.
Although bankruptcy rates in 2024 and 2025 were similar to those during the 2008-2009 recession, the overall corporate bankruptcy rate remains well below this peak. Analysts point out that this is largely because the UK now has far more companies on the register than during the financial crisis.
But Begbies warned that the combination of higher taxes, rising labor costs and the gradual withdrawal of pandemic-era leniency could still result in a delayed reckoning for thousands of financially vulnerable businesses next year.
