A zombie company is a business that continues to operate normally by trading and running its operations, but it has substantial debts that leave it unable to expand or grow.
These companies are typically unable to pay off their debts, yet continue to operate, effectively ‘zombifying’ themselves.
By only ever paying the interest on its debts rather than any of the capital sum, the situation shows little sign of improving. The company is in a state of stagnation, as it cannot make a profit to start paying off its debts, but it is not in such trouble that it faces closure. It also does not have the money to hire new employees to kick-start growth but cannot afford to make any redundancies.
Radio 4 made a useful program about the subject, which you could listen to here.
Potential Causes of Zombie Companies
A decade of historically low interest rates in Britain has created an environment where struggling businesses can continue to borrow at manageable costs, effectively enabling them to persevere rather than undertake necessary restructuring.
I believe this situation has been further complicated by government support schemes, such as the Coronavirus Business Interruption Loan Scheme, which, while well-intentioned, may have inadvertently propped up companies that were already facing significant challenges pre-pandemic.
It’s also worth noting that the UK’s economic recovery from the pandemic has been notably uneven, characterised by stubborn inflation and weakened consumer spending. This uncertainty has muddied the waters, making it increasingly difficult to distinguish between temporarily distressed companies and those that are truly ‘zombies’. Many businesses are now grappling with high debt burdens, finding themselves in a position where they can barely service existing obligations, let alone invest in growth.
How many Zombie Companies are there in the UK?
According to recent analysis by BDO March 2024),12.4% of UK mid-market businesses are now ‘at risk’ of being or becoming zombies. This represents a slight increase of 0.4 percentage points since Summer 2023, continuing an upward trend over the last 18 months
Key points from the data:
The analysis covered a total population of 15,600 mid-market businesses in the UK.
There has been a steady but consistent uptick in the proportion of ‘at risk’ businesses over the last 18 months.
Leisure and hospitality remained the most’ at risk’ industry, with 22.3% of businesses, an increase of 1.9 percentage points from the previous tracker.
The South East, Greater London and West Midlands regions have the highest proportion of ‘at risk’ businesses.
There are several strategies you can employ to avoid falling into the zombie trap and breathe new life into your business.
What are the Options for a Zombie Business?
If you feel like your company’s liabilities are spiralling out of control, it’s time to take some professional advice. There are several strategies debt experts like ourselves can employ to help your company escape debt
Creditors’ Voluntary Liquidation (CVL)
If your company is insolvent and there’s no realistic prospect of recovery, a CVL might be the most appropriate course of action. In this process, the company’s assets are sold, and the proceeds are distributed to creditors. While this means the end of the current company, it allows directors to move on and potentially start afresh with a new venture.
Administration
Administration is a formal insolvency procedure that provides larger companies with breathing space from creditor pressure. During this process, an insolvency practitioner takes control of the company with the aim of either rescuing the business as a going concern, achieving a better result for creditors than liquidation, or realising property to make a distribution to secured or preferential creditors. Because it’s an expensive process, it’s not appropriate for smaller businesses.
Company Voluntary Arrangement (CVA)
A CVA is a formal agreement between your company and its creditors to repay debts over an agreed period, typically three to five years. This arrangement allows you to continue trading while gradually settling your debts, providing a path back to financial health. A CVA can be a powerful tool to restructure your company’s liabilities and improve its long-term viability.
Time to Pay Agreements
If your company owes money to HMRC, you may be able to arrange a Time to Pay (TTP) agreement. This allows you to spread the payment of your outstanding tax liabilities over a period of time, usually up to 12 months. A TTP agreement can provide much-needed breathing space and help alleviate immediate cash flow pressures.
