Zombie Apocalypse

August 1, 2023

The day of reckoning looms for The Walking Dead. In December 2021 our newsletter highlighted the huge rise in ‘zombie companies’, businesses that had been artificially propped up by Covid loans and relatively low interest rates on their core borrowings. Many of these are now – literally, in zombie terms – on their last legs.

As assistance and forbearance ended, the future of these businesses was not as simple as ‘thrive or go bust’.  Several were left in a ‘zombie’ state of only just covering their debts, let alone being able to invest in growth. It is a possibly unforeseen consequence of state-backed, but ultimately commercial borrowing during the pandemic. There has been no prospect of converting any of this debt into equity; companies that may have been trading at modest profitability pre-Covid are now, after an extended period of depressed trading followed by inflation and higher interest rates, faced with treading water at best, solely to service borrowing.

Lack of cash, as ever, is the killer. Even if the longer term promises improvement, generating insufficient cash month-on-month to satisfy lenders will normally mean that the end of a business is in sight. SMEs topple first. They inevitably end up in a cycle of robbing Peter to pay Paul, too often in a miserable combination of late settlement with suppliers and non-payment of corporation tax and/or VAT.

If there is still hope of survival and cash is tight partly because of slow paying customers, managers exercise a much tighter grip with money owed:

  • Contracts are crucial when work or goods are invoiced in arrears
  • Make clear that interest will be charged on late payments
  • Establish a robust, stepped policy for eventual legal action

Suppliers to troubled companies must have the confidence to chase payment and enforce their terms, regardless of the perceived risk of upsetting  a customer. The problem has already become existential for the creditor’s business.

In terms of dealing with a business’s own creditors, managers can’t afford to bury their heads in the sand: they MUST take action sooner rather than later to keep their enterprises afloat and, in particular, stay on the right side of HMRC:

  • Get on the front foot with tax. Engage and explore a time to pay arrangement. Being unresponsive only aggravates HMRC and hastens a winding up petition
  • Look at extending credit terms. Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
  • Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.

Zombie’ businesses facing crunch time should seek professional advice on the potential for debt restructuring, credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to explore a last-ditch attempt to stay afloat.

Written by James Bryan, Restructuring Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.


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