Zombie companies – be very afraid

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The acclaimed comedy film Shaun of the Dead featured Simon Pegg and Nick Frost trying to keep hordes of zombies at bay, as they infiltrated a leafy suburb. The humans sought refuge in a pub called The Winchester Tavern, where the final grisly showdown takes place.

In the business world, there is no shortage of zombies. Whilst there is no set definition, a regular symptom of such a business will be that is getting by through paying interest due on its debts, but not the underlying debts. Absent parental company or third party support, the business may only be surviving courtesy of the continuing low interest rates in the UK. Its viability in the future may therefore be questionable.

The numbers are concerning. According to insolvency and restructuring trade body R3, over 10% of UK businesses are just paying interest on their debts and can therefore be categorised as zombie businesses. For those making their way through the business day, on their way to your version of The Winchester, you may be mingling with quite a few zombies along the way. What is problematic is that whilst the zombies in Shaun of the Dead were mainly identifiable from their eye popping appearances, business zombies may present themselves as entirely normal. Left unchecked, they may damage your business, potentially fatally.

Zombie businesses may well be trading in order to meet their interest payments, making them the JAMS (Just About Managing) of the business world. They are not the same as registered dormant companies, which strictly are not (and should not be) trading but remain in existence. Nor are they necessarily the same as moribund companies, which are not registered as dormant but which, seemingly year in, year out, post a near identical picture, often with a deficiency on the balance sheet.

Unlike in Shaun, it should not be automatically assumed that a zombie business is inevitably going to fail. There may be strategic reasons why the business owners want to maintain capital levels and keep cash in the business for a period of time, or a plan to restructure at a given time if market conditions dictate this. There is also no apparent appetite for legislative intervention in respect of businesses that pay a wage to management and staff.  Be that as it may, the expectation is that many zombie companies are hanging on for dear life; any significant change in the economic climate or, importantly, hikes in the current interest rates may well cause them to topple.

Whilst bank and general creditor forbearance may help to keep these companies alive and prevent a seismic increase in corporate insolvencies should rates go up (as they are likely to do), this is not just a matter of interest rates. The B word must also be a factor; as and when Brexit is finally resolved, trading conditions may remain tough. Depending on the final outcome, those businesses relying heavily on the single market, tariff free trade with and/or a supply of labour from the EU may get into difficulties, rate rises or not. As R3 states, stockpiles currently built up due to the possibility of a no-deal Brexit will put pressure on cash flow and investment in other areas. These will also take time to turn back into cash.

Zombie businesses are not a force for good for the economy. They are a symptom of stagnation. They can be associated with lower levels of productivity due to lack of investment funds. This may in turn starve new, more agile businesses of the funds and staff they need to grow. Whilst the prevention of mass insolvencies spares some dramatic headlines in the business press, keeping decayed trees in the forest may prevent new saplings from emerging. The chances are once a zombie, always a zombie.

This impacts upon businesses dealing with zombie businesses, whether they suspect them to be zombies or not. They may find longer delays in getting their invoices paid, credit terms being negotiated or future orders dropping, causing reduced profits, decreased growth and/or cash flow pressure for themselves. The current indications for the UK economy are that there are increasing signs of distress and decreasing signs of growth, so the zombies are likely to increase.

Drawing this together, if you are involved in the management of your business you need to be acutely aware of whom you are contracting with. There is no registration category for zombie companies at Companies House and their representatives do not wear an identifying badge, so if you are dealing with a customer, look out for the warning signs. These may include delays in payment, cash flow problems, requests to renegotiate terms and news of redundancies. This is a sound approach in any event, as your customer may not necessarily be a zombie, but it might still be sick, showing similar symptoms.

Equally, look out for distress signals from suppliers; you won’t have payment delays, but you may experience the opposite problem, with a supplier negotiating payments up front or on delivery when the course of dealing was not previously the case. Bear in mind that if a company is in distress and supplying core services, this will quickly impact upon your KPI’s, the delivery of essential services and, worryingly, a potential loss of support. If your IT services provider is a zombie company, you may turn up one morning to find those services withdrawn and with key access codes unavailable, as your next contact with the company is with an administrator or liquidator.

If you can keep the zombies or the otherwise unwell under control, then this will reduce the risk of losses suffered by your business, be these financial or otherwise. Do bear in mind that zombies may have been in good health for a long time and only recently become afflicted. Things change; in the current business world, very quickly. Interest rate hikes may not be imminent, but with current political turmoil and the uncertainty and inflationary pressures this may create, who can be sure what is ahead of us. Don’t assume that the company you have been dealing with as a customer or supplier without controversy may not suddenly be putting you in danger. If you can keep the zombies at bay, then you have every chance of having a nice relaxing drink at The Winchester; or at least a safe journey home.

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If you are concerned about a customer or supplier being in distress or have concerns about the stability of your own business, please contact BLM partner and head of commercial litigation, London Stuart Evans.

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