Thursday, 29 November 2012

Zombie companies – the Need for Advice

Contrary to the predictions of many commentators at the start of the credit crunch, the continued recession has not led to a surge, but a decline, in corporate insolvencies and numbers now are now at their lowest level since 2008[1].
Instead there has been a rise in the number of so-called ‘Zombie’ Companies[2]. These companies are carrying a heavy debt burden, but with few assets, that financiers are allowing to continue to service their interest charges without reducing their debt instead of pursuing any formal insolvency procedure against the company due to the poor prospect of any dividend.
Zombie companies need expert insolvency and financial advice now if they are to survive the much anticipated economic recovery. Restructuring existing finance arrangements is a key strategy for a Zombie company and the company’s accountants should be encouraging directors to think seriously about their present situation as well as preparing for their future.
Outof court restructuring can be either by a consensual route with the financier to obtain the relaxation of financial covenants, payment holidays, revised payment plans, standstills or other amended terms or by using the companyvoluntary arrangement regime under the supervision of an insolvency practitioner which would give the company the necessary time and flexibility to resolve its financial difficulties.
Directors of Zombie companies also need advice from insolvency practitioners and lawyers on the risks of trading in this twilight zone of the company being insolvent on any of the conventional insolvency tests or if the directors ought to have known the company was insolvent (particularly if they are concentrating on meeting the cash flow test at the expense of satisfying the asset test). It may be crucial in the event of any investigation of the conduct of a director and defending any director disqualification action in the event of the company entering administration or liquidation in the future, if it can be shown that the director was taking professional advice throughout this time.
Rather than wait for what many insolvency experts view as the inevitable collapse of Zombie companies, now is the time for insolvency practitioners and financiers to become involved in the strategic planning of this crucial phase of SME survival.
For more information please feel free to contact Ambuja Bose, Partner, on 0207 841 0390.

[1] Insolvency Service statistics released on 2 November 2012
 [2] 146,000 zombie companies in the UK, around 8% of all businesses: R3