12th February 2021
The term ‘zombie company’ originally referred to the large Japanese corporations that were bailed out by their government in the 1990s. It was widely used again during the last global recession, but what exactly does it mean and what should you do if you run a zombie company?
When a company is unable to grow due to high levels of debt, but isn’t actually insolvent and can still service its debt, it’s referred to as a zombie company. Figuratively, it’s trapped between life and death, unable to move on but unwilling to close down.
A zombie company uses the cash it generates to pay the interest on its debts so it’s unlikely that lenders will enforce liquidation as long as this continues. Similarly, if directors have provided personal guarantees for lending, they won’t want the company to enter voluntary liquidation as they’ll become personally liable for any outstanding amounts.
Three main elements can create a zombie company:
Low interest rates
The historically low and stable interest rates we’ve seen for many years now enable zombie companies to service their debt and continue in business. If interest rates rise in the future, however, there’s likely to be a significant rise in the number of these companies experiencing financial distress.
Banks and other lenders
As long as lenders receive interest on their debt, they’ll be reluctant to take action against zombie companies as they’re likely to receive lower returns if these businesses enter administration or liquidation.
HMRC’s focus in recent years has been on tackling deliberate tax avoidance and tax evasion, so if they know a company isn’t deliberately refusing to pay, they may be more willing to negotiate extra time rather than forcing liquidation.
An excessive number of zombie companies negatively affect the economy by causing stagnation. They use up resources that new businesses, or existing companies that are flourishing, could benefit from - space to trade on the high street, for example, or talented staff.
If yours is a zombie company you’re still in business but also in a perilous and vulnerable position. So what can you do to break the zombie stronghold and begin to trade again with purpose?
As the key cause of ‘zombie’ status in business is lack of cash, obtaining a suitable alternative source of finance will boost working capital and allow you to trade again purposefully, rather than simply treading water.
There’s a wide range of funding options that don’t involve the banks, including invoice finance, asset-based funding, and merchant cash advances if you’re in retail. All are quick to access compared with bank loans, and can provide you either with a cash lump sum or regular monthly cash injections.
HMRC Time to Pay arrangement (TTP)
A Time to Pay arrangement with HMRC offers you extra time to pay your arrears, although you’ll still need to keep up with ongoing tax liabilities. You’ll have to present a strong case to HMRC when applying, but also make sure you can afford the amounts you’re proposing over the full term, as if you fail to make a payment they’re likely to wind the company up.
Company Voluntary Arrangement (CVA)
If the company is viable for the long-term, a CVA may be a suitable way to trade your way out of financial stagnation and start to prosper again. It’s a formal insolvency procedure that’s administered by a licensed insolvency practitioner (IP), and their initial assessment will determine whether the procedure is appropriate in your case.
One of the key benefits of a Company Voluntary Arrangement is that creditors can’t pursue your company for repayment as long as you adhere to the terms and conditions. Additional interest and charges are also stopped to allow you to repay as much of the existing amount as possible.
If your company is experiencing financial difficulty or is already a zombie company, our expert team at Real Business Rescue can provide the reliable advice you need. Please call to arrange a free same-day meeting with one of our licensed insolvency practitioners – we work from a wide network of offices around the country.