Do ‘zombies’ still roam the halls of Companies House?

Posted: 31/10/2023

What is a ‘zombie company’?

The term ‘zombie company’ refers to companies which generate just enough cash to operate and service their debt, but not enough to invest in growth. They exist in a form of ‘half-life’.

What was the cause of death?

The significant period where the Bank of England’s base interest rate was close to zero, which made borrowing incredibly cheap, allowing companies in this ‘zombie’ category to limp on despite otherwise having been unable to. It has created the economic version of ‘The Last of Us’.

What has changed in the last 12 months?

As fiscal conditions have tightened, with the Bank of England base rate continuing to increase, more companies are expending funds in servicing their debt and are not able to grow, or are beginning to contract. In addition, the effect of prolonged high levels of inflation is decreasing consumer spending power. This means that last year’s zombie companies are likely to find themselves in a distressed position and will be facing the prospect of insolvency. It may well force the extinction of some of the zombies.

What steps can you take to protect yourself if doing business with a potential ‘zombie company’?

Whilst it is often hard to know what the true position of a counterpart is, due to the delayed nature of filing of accounts, the ordinary principles of due diligence should be observed. In short – keep a very close eye on them. In addition, consider some of the following:

• a review of terms and conditions, to reduce the period for payment and ensure robust termination rights in the event of breach;
• proactive contract management to ensure any losses from a breach of contract are minimised – manage the situation early, as soon as things appear to get tricky;
• inclusion of a retention of title clause, if supplying goods;
• incorporating a requirement for a personal guarantee (usually from a company director);
• taking security.

Are you a director of a ‘zombie company’?

If this article resonated in respect of a business in which you are a director, seeking professional advice early, from turnaround specialists, should be high on your/the board’s agenda. At the point that a business’s balance sheet position begins to worsen, proactively assessing the options available, which may include restructuring of the business, can allow what would otherwise be a death-spiral to be stemmed. 

In addition, directors should ensure they are fulfilling their duties to act in a manner that promotes the interests of the company’s members, or its creditors in certain circumstances, and capturing those considerations contemporaneously. Insolvency advisers can explain what that means, in practical terms, for the business and exposure of its directors.

This article is intended to provide a summary of the law in this area and does not constitute legal advice. Should you wish to obtain advice based on specific facts and circumstances, please contact us.

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