A rise in “Zombie Companies” post lockdown

August 26, 2020 / News & General

According to a recent analysis by the BBC, there are many so-called “zombie companies”
that have been barely sustained during lockdown, which are now teetering on a cliff-edge.
The analysis revealed a noticeable rise in businesses going bust in March, which then
seemed to slow during the initial months of lockdown, when the government’s support
package worth £160bn came in.

However, many companies have still been accumulating significant debts during this time
and will seriously struggle post lockdown, according to the Institute for Fiscal Studies (IFS).
In response, the government has stated that it would be ‘adjusting’ the support offered as the
economy begins to open back up.

What is a zombie company?

These companies are seemingly functioning in the day-to-day but cannot pay off the full debt
that they owe, and have been surviving thanks to the low interest rates. They also can’t find
the funds to invest and grow the business either. The main features of a so-called “zombie
company” include:

  • Low profitability that’s persistent
  • Static or falling turnover
  • Increasingly tight margins
  • Very limited cash and working capital reserves
  • A severely reduced capacity to invest for the future.

Many of these companies were clinging on to survival before the pandemic hit, and the crisis
will likely finally force many completely out of business.
Won’t survive long term

Insolvency notices did slow in April, according to the BBC analysis, which looked at how
many companies had posted insolvency notices, where they can no longer pay their debts,
in the London Gazette.

It found that there was a surge of 4,200 insolvencies in March, just before lockdown fully hit
the UK. This rate slowed by 23% over the next 3 months when compared to the same period
in 2019.

As these statistics show, a lot of these companies have managed to hang on during this
period of lockdown, partly thanks to loans and tax deferrals, along with changes to
insolvency law and reduced court services. However, mounting debts will make it much
more difficult for them to continue in the long term.
These support measures, while much-needed, will have simply delayed the inevitable for
many company owners.

Expert advice

If your company is having cashflow and debt problems, you should seek professional advice
as soon as possible. And certainly before you put any new funds into the company.

Want to know more?
If you’d like to discuss the options which are available to your company, contact Clarke Bell
now on info@clarkebell.com or 0161 907 4044.
We will not charge you for our initial consultation.
Any fees subsequently charged will depend on the solution you choose and will only apply
once properly authorised.
Our advice is confidential.