Don’t mention the “Z” word…

What is a Zombie Company

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Shaun of the Dead came to terms with the reality of the zombie apocalypse and grappled with all of his responsibilities before leading his friends to what he felt was the sanctuary of The Winchester.

In the same way that Shaun didn’t want to mention the “Z” word for fear of hoaxing their position, directors across the globe are now struggling financially, due to the Coronavirus crisis. Many of these directors are responsible for “Zombie Companies” who were already facing financial distress before the crisis hit.

What is a Zombie Company?

The Zombie term applies to companies that are unable to stand on their own two feet. The company is being kept afloat by their creditors and bailout(s) from its stakeholders and/or the Government.

The term is also used to refer to a company which is unable to reduce the debt it has on its balance sheet and it merely pays the interest on its debts.

What does history tell us about the Zombie Companies?

Economists have historically said that too many Zombie Companies emerged after the global financial crisis (as seen in the Lost Decade in Japan in the 1990s and again after the recent banking crisis), and the existence of these companies was holding back the economic recovery.

What is the impact of the Government helping companies out?

The Government were damned if they did and damned if they didn’t. The opposition were always going to criticise from their comfortable cushion, sat on the fence whilst watching the crisis unfold. No doubt thanking their lucky stars that they didn’t have to deal with such a difficult situation, the likes of which the modern world had never seen.

The support given by the UK Government during the current crisis, with small grants for rates, furloughed payments and bounce back loans, were invaluable to the vast majority of seemingly viable companies and their business owners.

Whilst these funds were gratefully received and the due diligence in granting the loans seemingly went out the window with self-certification(!!), there remains a large amount of companies across the UK who barely had a pulse before the crisis. These handouts/low interest loans are merely a band aid to deal with a deep underlying problem, as these Zombie Companies who accepted the handouts were not viable before the crisis and these monies do not change that fact and its destiny of an insolvency event.

Directors Responsibilities

As the country returns to work, the leaders of UK businesses need to ensure that they are proactive in understanding their business cash flow, balance sheet and their underlying duties as directors. Directors also need to understand their customers, as turnover is vanity whilst profit is sanity. If the customer doesn’t pay you, then this could result in a domino effect on your own business.

Failure to act promptly and correctly can leave the director(s) holding the can personally, for transactions they allowed the company to enter into in the period immediately prior to insolvency.

As a business owner, you know when your business is having financial difficulties. If your business is falling behind on payments to suppliers, you will be well aware that things need to change. The faster you act, the better your chances of turning things around.

Obtain independent professional advice as early as possible, as this may be the key to survival in the face of insolvency or may prevent you as a director entering into a transaction, that will leave you personally liable for some of the company’s liabilities.

 

Need help? Contact our specialist team on 0800 009 6106 or hello@myinsolvency.co.uk.

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