Insolvency Practitioners and Zombie Companies

Zombie Companies, The Interest Rate Increase and Insolvency Practitioners.

In November  2017, we saw the first rise in interest rates by the Bank of England for 10 yrs, from 0.25% to 0.5%, with further gradual increases over the next 3 years being signalled by the Bank. There has been much speculation that this increase might well see beginnings of insolvencies amongst  the large number of so called Zombie companies in the UK. This article looks at why that might be so, and looks at what Insolvency Practitioners could do to help.

What is a Zombie Company?

The term has been around for a few years now, especially since the last recession, where many more companies survived, just, than was predicted. These are the so called Zombie Companies.

At the time, interest rates were cut to very low levels very quickly, and a feature of these low interest rates has been the survival of companies who just about manage to pay off the interest on their debts (because of the ultra low interest rates), but make little or no profit. These companies would have struggled to survive in the past when interest rates were typically 4-6%. It’s also true to say that the banks have been reluctant to call in these loans, which has also helped the survival of the zombies.

At one point it was estimated that there were 160,000 of these Zombie Companies in the UK.

What Could be the Effect of Rising Interest Rates on Zombie Companies?

Zombie companies are especially fragile and therefore sensitive to any upward adjustment in rates and are at risk of failing if subjected to a rise in the cost of their borrowings. The Bank of England’s announcement will pile further pressure on many businesses already operating in a challenging economic environment characterised by rising costs, an increase in corporate insolvencies and consumers being more prudent with their spending.

According to research from the Insitute of Accountants in England and Wales we can expect further slugish glowth and this may now be the time when the majority of the zombie businesses fail.

So, How Can Insolvency Practitioners Help?

These Zombie Companies are in a position of distress, or zone of insolvency, as our co-branded ICAEW Restructuring and Insolvency guide defines it. The 6 signs of distress are:

• Cash Flow,
• Defaulting on Bills
• Extended Debtor or Creditor Days
• Falling Margins
• Stress and Unhappiness
• High or increasing interest payments

Our advice to companies in distress is to seek professional advice from a licensed insolvency practitioner as early as possible, as there are more options available without having to adopt a formal insolvency procedure. These options include: negotiating with HMRC, preparing cash flow plans, renegotiating debt repayments, dealing with creditor pressure and recommending restructuring and turnaround plans.

If action is not taken during the distress period, the outcome is often a crisis, where the options become: a company voluntary arrangement, administration, receivership or liquidation.

If you feel your company falls into the Zombie bracket and that your company is in distress, especially as a result of the interest rate increase, please contact our team of insolvency practitioners or call us on 0208 088 0633 for a FREE initial discussion. The sooner you get in touch, the more we can do to help.