Is your business one of the walking dead?

What is a zombie company?

A zombie company is a company which is, as the name suggests, is not really alive.

It’s not undergoing insolvency proceedings, so it looks okay – but it isn’t actually productive in any way.

Zombie companies will often have large, longstanding debts which they are not clearing and on which they are merely paying the interest. They have no money to invest in growth, and if the market declines or their cash flow is unexpectedly interrupted, it could be curtains. 

Why might a business become a zombie company? 

Interest rates in the UK are low right now, which makes it possible for struggling companies that would fail in a high-interest environment to keep going. Banks and finance companies often don’t want to take action if the company is paying the interest on its debt; if they think they’re not going to get their money back, they often just prefer to keep collecting the interest and hoping the company can turn itself around.

With Brexit less than six weeks away and still absolutely no idea of what form it’s going to take, some investors are nervous and less likely to want to take a chance on struggling companies. And directors who have provided personal guarantees against their company debts will not want to put their company into voluntary liquidation.

Why does this matter though?

Zombie companies are widely considered to weaken economic growth.

The company can’t invest in new products or services. Its workers get a raw deal, as the directors can’t afford to increase their wages. The company isn’t making any real money, so it isn’t contributing much tax and the money invested in the company and its staff, could be better re-deployed to more profitable enterprises instead.

That said, as long as the company continues to trade, its employees still have jobs – zombie wages are better than no wages.

Is there a zombie business apocalypse?

No, but a significant number of companies are having trouble.

In research at the end of last year, R3, the trade body for insolvency professionals, found that 11 per cent of UK companies were just paying the interest on their debts without repaying the debts themselves and could be classed as zombie companies.

The survey of 1,200 companies, carried out by research firm BVA BDRC, also found that 16 per cent of businesses were having to negotiate payment terms with their creditors.

Additionally, 12 per cent were struggling to pay their debts when they were due, and 8 per cent said they would not be able to pay their debts if interest rates were to increase by even a small amount.

  • Some 20 per cent said they had been waiting for invoices that were more than 30 days overdue to be paid
  • 16 per cent said they said seen a drop in sales
  • 16 per cent said they had seen a drop in profits
  • 13 per cent said they regularly used their maximum overdraft
  • 12 per cent said they had had to make redundancies

 

Only 67 per cent of businesses, a two per cent drop since April, said they had seen signs of growth.

R3 president Stuart Frith said: “Our members have reported that economic uncertainty is contributing to businesses treading water, with some building up stock to safeguard against future risks – such as the UK leaving the EU without a deal in March.

“Investing in the stockpile puts pressure on cash flow and investment in other areas, while large stockpiles will take time to turn back into cash and are at risk of obsolescence.

“Some zombie businesses might eventually be able to restructure or find new investment, and grow. Others will run out of road and become insolvent. While this would mean capital could be recycled, it may also be a bit of an economic shock in itself.”

Frith said he welcomed new measures announced by the government last September to help companies in distress.

“While they still need a lot of work, the proposals could give insolvency practitioners more tools to help turn around struggling companies, and boost productivity,” he said.

What about Brexit?

Caroline Sumner, technical and education director at R3, said Brexit could have a significant impact on international insolvency proceedings.

At the moment, EU law provides that an administrator or liquidator appointed in one EU country is automatically recognised in the others and that court judgments made in one EU country are also recognised and enforceable in others.

Cross-border insolvencies can therefore be dealt with as if they were taking place in one jurisdiction rather than several. A UK insolvency practitioner, for example, can take control of assets across the EU. This simplified approach keeps costs down, as there is no need for multiple applications to courts in different countries and makes it harder for people to try to hide assets abroad to avoid paying what they owe.

“No deal would mean it would become much harder to resolve cross-border insolvency cases from the UK,” Sumner said.

“A UK insolvency practitioner appointed as the administrator of a company with cross-border operations would have to initiate insolvency proceedings in all the other countries where the company has staff, subsidiaries, or other assets.

“This will add layers of extra time and expense, reducing the returns available to creditors, and making it harder to investigate any suspected wrongdoing.

“It is the Government’s stated policy to seek a post-Brexit agreement which closely reflects the existing framework; while this is positive, the shape of the future relationship remains to be decided.”

What can I do to bring my zombie company back to life?

If you already owe money to the bank which you’re not paying back, the bank is probably not going to want to lend you more.

A Chartered Accountant’s advice might be to pursue one of the following courses:-

  • Selling your invoices (there are companies called factoring companies which buy other companies’ accounts receivable)
  • Borrowing against your invoices
  • Peer-to-peer lending, where lots of small private investors lend you small amounts of money, often through a website, to make one big loan
  • Crowdfunding
  • Directors’ loans
  • Refinancing your assets

 

Speaking to your business advisor will enable you to explore the options open to you.

If my company goes into liquidation, is there any financial help for me personally?

A director of an insolvent limited company can submit a claim to the Redundancy Payments Service, a division of the Insolvency Service, for up to £15,240 of redundancy money. You may also receive up to eight weeks of unpaid wages and up to six weeks’ accrued holiday pay.

Can I not just carry on pretending everything’s okay? Stiff upper lip …

No. Trading while knowingly insolvent is potentially illegal and can land you in serious trouble. You can incur personal liabilities if you don’t take reasonable steps to sort things out.

At THP Chartered Accountants, our financial advisors in Surrey, Essex and London help companies across the south east with every aspect of their financial affairs – so we can hopefully help you either stay in the black or get back into it. If you’d like to chat, just give us a call at our head office or contact your local branch in Cheam, ChelmsfordWansteadSaffron Walden and London City

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