UK: The Zombies Are Coming!

Last Updated: 19 September 2013
Article by Edward Starling

The press has been full of commentary on the prevalence of "Zombie" companies. These are companies that are surviving by the skin of their teeth. They are often scraping by, just about paying their primary lender, and so have escaped an insolvency process. This is in part a result of the extremely low interest rates. Most specialists agree that when interest rates rise, so will the number of Zombie companies that finally succumb. Another factor appears to be the reluctance of the primary lenders to be seen to be the catalyst for an insolvency process for (understandable) reputational reasons, particularly in the case of the government owned banks.

Traditionally there is an increase in insolvency processes after a recession has finished and when the economy has started to grow and the Zombies' more stable competitors have strengthened and gained a competitive advantage. If the shoots of recovery are now showing then the likelihood of some Zombies finally hanging up their boots, increases. Many in the wider corporate market even argue that these Zombies are in fact inhibiting growth and stifling the economy and that some sort of cull would be more beneficial.

Zombies are everywhere, so what can you do if you discover a Zombie in your back garden be it as a supplier, customer or other stakeholder. Here are a few practical tips to minimise the impact of a Zombie attack:

  • Watch the Zombie. Whichever end of the corporate food chain they are, carefully monitor their position. If you are concerned, ask others in the market (discretely to avoid spreading rumours), get a credit report or just have a poke around on the Internet for any useful information.
  • Know how the Zombie affects your business.  Find out exactly what the Zombie does for your business.  Are the goods or services vital to your business? Can you be held to ransom? Are they paying on time? Are they asking for additional credit? Get a credit report and see if there are County Court Judgements or other evidence of financial difficulty.
  • Don't feed the Zombie. If you are concerned about the position of a customer, seriously consider every application for credit or services. Are they going to pay/deliver? Should you reduce credit? Should you get deposits or up front payment? Perhaps consider changing the internal lines of authority on credit approvals to ensure an objective decision is taken as to whether to extend credit that is in the best interests of the business as a whole not just, for example, a pure focus on sales.
  • Understand your contract with the Zombie. Check your terms and conditions / contract to see what your rights are. If you have serious concerns, is it feasible to terminate the contract to cut your losses? If you provide goods, do you have a valid retention of title clause to get the goods back? If not, can you renegotiate the contract or impose retention of title?
  • Engage the Zombie.  In most circumstances, companies suffering financial difficulties limit the communication with their stakeholders. Sometimes this is the burying of heads in the sand, other times it is embarrassment or simply an inability to devise a structured strategy to deal with the issues.  Engaging with the issue often has a better chance of limiting exposure or alleviating some of the problems, than does denial of the problem.  If the Zombie does however end up failing, you will have made all attempts to resolve the issues / protect your position and the information provided by the Zombie (or lack of it) may assist in formulating a claim against the directors of the Zombie at a later stage (which may lead to a recovery for the benefit of all the creditors of the Zombie).
  • Avoid the Zombie. Has it got to the stage where, particularly in the case of suppliers, you need to diversify your supply chain to limit the impact if the Zombie fails? When considering changing suppliers or using new suppliers (but reducing the Zombie's involvement), check the contract to ensure there are no penalties for any change.  Be careful however as where you are a major customer of the Zombie, the reduction in your custom may well be the final trigger for an insolvency process. Also consider any reputational or branding issues with being associated with the Zombie or indeed the down fall of the Zombie.
  • Buy the Zombie.  This is an extreme solution but can be used to great effect.  If the Zombie is vital or significant to the functioning of your business, can you buy the assets and bring the service in-house or within the wider corporate structure?  This was used recently by Virgin Active when a not insignificant supplier was failing.  To avoid Virgin Active's service suffering further, it acquired the assets of the ailing business through a pre-pack administration.

Most of the above are common sense and may be built into your existing standard practices but these steps should help the decision making process.  The difficult question is knowing when to draw the line between helping the Zombie or taking action that may well terminate the Zombie in order to protect your own business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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