Zombie companies are again the subject of discussion now the Government sponsored support packages to offset the economic downside of the Covid 19 pandemic are ending. This also brings the likelihood of a substantial increase in the number of formal insolvencies over the next few years.

To decide whether a Zombie company is a burden or an opportunity it is necessary to explain the term and its implications.

In simple terms a Zombie company is one which continues trading despite carrying a level of debt which cannot be serviced from its economic activity. It is a financial state which can exist for prolonged periods of time especially when a significant part of the total debt arises from Government backed loans and cash subsidies provided as a short term “lifebelt” to support the economy.

The side effects of Covid 19 now include an increasing number of Zombie companies the existence of which has long-term damaging effects on the economy due to labour, capital and assets tied up in stagnant entities.

The Covid 19 business support falls mainly into the following categories:-

· furlough subsidies and cash grants which are not repayable

· guaranteed loans which are repayable

· extended credit including time to pay arrangements for VAT, PAYE/NI

all of which can extend the life of a Zombie company.

Having provided this support the Government recovery policies must not exacerbate the problems they were intended to resolve. As a result, recovery of this debt is much harder to achieve than commercial loans, generally to assist the borrower to fund growth or manage short-term cash flow requirements, advanced after credit assessment and risk pricing with specific repayment terms.

The Covid 19 business support now totals £350 billion and includes c£80 billion of repayable business loans categorised as :-

· BBLS (Bounce Back Loan Scheme)                                                 £47.4 billion

· CBILS (Corona Business Interruption Loan Scheme)                      £26.4 billion

· CLBILS (Corona Large Business Interruption Loan Scheme)          £5.5 billion


(These schemes closed on 31/03/21 and were superseded by a Recovery Loan Scheme from 06/04/21).

The loan schemes are supervised by the Government owned British Business Bank and the monies advanced by accredited lenders supported by a Government guarantee.

The loan eligibility criteria excluded companies in difficulty at 31st December 2019 but that limitation was almost worthless in practice and it is inevitable that Zombie companies have benefitted and more have evolved.

This £80 billion of guaranteed debt was hurriedly advanced with flexible repayment terms now resulting in bad debts due to the inability to repay and numerous fraudulent applications. Compounding guarantee costs for the Government is the fact that Zombie companies do not generate profits on which corporation tax can be assessed.

All recoveries will take a considerable time to collect and failure by the lenders to recover any part of these loans, for whatever reason, will be at the ultimate expense of the taxpayer.

Zombie companies are clearly an economic burden so how can they become an opportunity?

Whilst in a Zombie state, the owners of such companies are reluctant to voluntarily commence insolvency proceedings due to the unavoidable loss of both capital and a regular income along with the crystallisation of personally guaranteed company debts.

Consequently, Zombie companies often continue trading beyond the point of no return and simply await creditor pressure to force an insolvency process. The benefit of redundancy pay can outweigh the limited risk of wrongful trading claims and/or disqualification proceedings against the directors.

Many Zombie companies achieve considerable levels of turnover, which in the event of failure will be picked up by other successful companies, and those with low levels of turnover will simply fall away and not be missed in the marketplace.

To exploit the opportunity to acquire a Zombie company the first consideration is to assess the potential demand for its products or services and secondly, with new ownership and capital the capability of management to implement necessary changes to enable the Zombie company to succeed .

If the answer to both considerations is “No” then an insolvency process may be the best way of “recycling” the assets and skills into a new venture albeit incurring significant loss to creditors, substantial costs in respect of closure and most employee termination and unemployment benefits becoming payable by the Government.

If the answer is “Yes” to sustainable demand then an acquisition opportunity may exist if changes to the management structure are agreed as part of the acquisition process. On completion, the introduction of capital and improvements in the operational dynamics should add considerable value to the investment whilst ending the Zombie status.

Investors may see a major barrier to such an acquisition in the legacy debt but the pre-acquisition considerations may include either re-scheduling or compromising debt on terms acceptable to creditors.

Consideration could be given to a Corporate Voluntary Arrangement (CVA) to achieve a statutory debt reduction but in my experience most CVA’s quickly become time-consuming and expensive for all parties and seldom achieve their objectives. Increasingly, the CVA terms are subject to challenge at varying stages of the process which adds to the frustration of creditors and attracts unwanted publicity which can damage any residual brand value or goodwill.

Administration, now subject to even more frustrating pre-pack regulations, is not always applicable and liquidation is a “terminal” processes which may or may not result in a Phoenix outcome.

The Corporate Insolvency and Governance Act 2020 was introduced on 25thJune 2020 with  a free-standing moratorium, a restructuring plan and restrictions on the termination of contracts for the supply of goods and services. It also introduced certain temporary Covid 19 measures which have now ended.

Whilst the insolvency practitioner “monitored” moratorium and Court supervised restructuring plan are welcome additions to the insolvency toolbox, the legislation was introduced in haste, the new procedures appear to have had few applications to date and they are likely to become beset with legal challenges like CVA’s.

When creditor protection is required it is now available in even more formats, but for adding value to a Zombie company, despite its legacy debt, the acquisition opportunity is better approached with a negotiated turnaround objective rather than an insolvency led process.

Clearly many Zombie opportunities are available and a turnaround specialist can make introductions or target opportunities and advise on the acquisition process.

Tony Armitage FIPA, FCICM