If you’ve heard the term “zombie company” used in economic environments, you may be wondering what it’s referring to. In the simplest terms, a “zombie company” is a company which is neither thriving or failing. It is a company which makes just enough money to stay afloat, however doesn’t make enough money to invest and grow. In other words the company has become stagnant, and will most likely have debts, however it has not yet entered formal insolvency proceedings.
The issue with zombie companies is that they are very vulnerable to the slightest economic shock. They’re also problematic for the wider company, as the lack of productivity from zombie companies weakens economic growth.
Why Might A Business Become A Zombie Company?
Most examples of zombie companies will be reasonably mature- it doesn’t make sense for example to class a start up as a “zombie company” as they are likely to make a loss at the initial stages, and this isn’t to say that they’re stagnating.
One of the primary contributors to the emergence of zombie companies is low interest rates. This means that the interest rates on payments for debts is low and companies can remain in debt without making progress but without leaping backwards. As long as they receive interest payments, banks or finance providers are often unwilling to take action against historic debt.
What Steps Should Zombie Companies Take?
The risk with being a zombie company is that you don’t know when changes in the economic environment are going to deal you a fatal blow. The economy is always changing, which presents the risk of companies that are stagnating being thrown into more serious economic turmoil at any moment. With this in mind, it’s essential that these companies don’t just continue stagnating, but rather take proactive steps to close or recover.
Depending on the level of debt the company is in, it may be possible to implement recovery strategies to help the business repay its debts and return to a more healthy position for growth. This may include agreeing a repayment plan with creditors via a Company Voluntary Arrangement (CVA), or a time to pay arrangement if the majority of debts are with HMRC.
In many cases however, the best decision will be to close the company’s doors. Being proactive in placing the business into voluntary liquidation (via a CVL or MVL) will enable you to close the company in the most tax efficient way with the opportunity to claim statutory and redundancy entitlements. Continuing to trade as a zombie company presents a serious risk of trading while insolvent, or the risk of being forced into compulsory liquidation eventually.
If you are concerned about the health of your business and would like to discuss your next steps, please don’t hesitate to get in touch with our experienced team of business rescue experts and insolvency professionals at Ballard Business Recovery.
