Published: 19/08/2021 By Jane PriceIt was predicted that insolvency practitioners would be very busy as a result of the devastating effects covid-19 has had on UK businesses. But this has not been the case as government support has enabled the survival of these companies which would have otherwise failed.
The pandemic has created the perfect environment for a surge of Zombie Companies.
So, what do we mean by the term ‘Zombie Company?’
Typically, it is a company that can repay the interest on its debts but not the capital. There is no cash to invest, recruit or grow. The entrepreneur is unable to be paid market rate remuneration.
So, is the survival of these zombies a good thing?
Well, no. Who really benefits from a company which is so laden with debt that it cannot thrive?
- The shareholders - Zombie companies rarely post a profit and certainly can’t afford a dividend to shareholders. Ultimately the purpose of any company is to make profits which are then paid to shareholders.
- The directors - A non-shareholder director might appear to have a short-term interest in keeping a sinking ship afloat. However, if they are being honest, wouldn’t they prefer to show what they can achieve having restructured or started afresh with a company that is not shackled with a poor cashflow?
- The staff - Perhaps the directors think that by soldiering on they are doing the best for their staff? Again, this is short-termism. How does it feel each year when they have to explain that in spite of inflation, “the company can’t afford any pay rises this year.” In essence, they are giving staff an annual real terms pay cut to reward their loyalty and hard work! This will lead to the loss of their best staff and an inability to recruit. Hardly a recipe for success!
- The banks - Probably the party with the greatest vested interest in keeping the zombies alive. They are making profits from the interest and don’t want to write off the capital debt.
Insolvency numbers have not risen partly because of government support schemes. Thousands of struggling companies have been given a lifeline to continue to battle on and just simply exist without turning a profit or contributing meaningfully to the economy. Whilst these companies choose to hold on and continue to muddle through for the foreseeable future in reality, they would be better to look at alternative options and take the advice of an insolvency practitioner. Directors need to decide whether they want to carry on the company and therefore plan for certain scenarios to ensure the company and its creditors are protected. Or if directors choose to call it a day, there are options for that too.
We offer bespoke solutions for directors to restructure their companies and help directors to consider all options available to them not just necessarily the formal insolvency route. Have a look at our restructuring page for more information here Or give us a call on 020 8661 7878 for a free and confidential chat.
Read in more depth on this subject and what the ICAEW have to say here