What is a Zombie Company and What it Means for your Business?
A zombie company is a company which is not productive on the one hand, nor seeking to enter formal insolvency proceedings, such as voluntary liquidation, on the other. Zombie companies will often be burdened by large amounts of historic debt, but are just able to manage existing liabilities. This leaves them effectively in quarantine. The zombie company has no capital for growth and is vulnerable to market changes, leaving it in a never-ending business purgatory.
Zombie companies will generally be in payment agreements with finance providers where they are only making interest payments, but may even struggle to make these. (This was also the demise of zombie banks in 2008, where mortgages were provided at 125% loan to value. They were surviving purely on the interest repayments until cash flow became an issue.)
Why might a business become a zombie company?
If a bank or finance provider has identified a potential zombie company, they are likely to be unwilling to take action against the historic debt, as long as they receive interest payments. Likewise, directors may have provided personal guarantees against these debts, and as a result, they may be dead set against triggering these guarantees by entering voluntary liquidation.
Interest rates remaining at historic lows means that zombie companies are in a position to stagnate. With the Bank of England monetary policy meetings threatening to increase interest rates shortly, a number of zombie companies may be fine this month. However, 28 days later, they may find they have a serious problem.
What effect do zombie companies have on the economy?
The main effect of zombie companies on the economy is that they weaken economic growth. The Office for Budget Responsibility has blamed low investment by firms and low-interest rates for sustaining some zombie companies – otherwise, those same companies would have entered voluntary liquidation many years ago.
Recently, Lord O’Donnell has said that the economic recovery of the UK has been employment strong as a result of these zombie companies. However, due to the reduced prospects of increasing wages, after having to deal with historic debts, the productivity per worker is in fact much lower.
It may also be the case that some employees, with serious talent, are simply propping up zombie companies. With real opportunities, it is likely that they may be able to produce something more innovative.
The lack of productivity also keeps tax receipts at a lower level than they could otherwise achieve, resulting in continued austerity.
How could a zombie company seek fresh funding?
As the growth of the company has stalled and the company is burdened with historic debts, it may be difficult to obtain new funding. Bank finance is likely to be out of the question. However, you may be able to seek:
- Invoice based financing
- Peer-to-peer finance
- Providing further director’s loan
- Refinancing your existing assets
It may well be that you have already sought to obtain these finance methods, and they are unwilling to provide finance to the existing company. This may be taken as a warning sign that you should consider insolvency advice. Some funders may be more willing to provide finance if the business is bought out of voluntary liquidation and unburdened of its historic debt. Further details of funding available to struggling companies can be found here.
What if I believe my company may be a zombie company?
If you think your company might be a zombie company, even a small interest rate rise may leave you feeling like the sky has fallen. While it may be a big step to pull the plug and seek insolvency advice, it may become a relief once the company is dead and buried. The team at business rescue expert provides a full review of the options available to you, including but not limited to:
- Creditors Voluntary Liquidation
- Company Voluntary Arrangements
- Time of pay agreements
It is likely that if you have been running a zombie company, there is also a historic debt to you as a director regarding your salary entitlements. You might not be aware that you may be able to make a claim for unpaid employment entitlements from the redundancy payments office.
You should also remember that there is a serious risk if you are trading while insolvent. You could incur personal liabilities if you do not take reasonable steps to deal with the problem. If personal guarantees are of particular concern, there is no need to disappear to a cabin in the woods. Depending on your circumstances, it may be possible to propose an individual voluntary arrangement to satisfy these debts.