The Rise and Fall of Zombie Companies
The Rise and Fall of Zombie Companies
Formal insolvency numbers are lower now than they were pre-Covid, but these numbers may be masking many businesses who are likely to question whether it is worth carrying on in the coming months.
All the Insolvency professionals we speak to share the general feeling that everyone is currently relatively quiet and that this is largely a consequence of the government support measures. These measures have proved a lifeline for many businesses and by February 2021, some £54bn had been spent on furlough scheme payments and over £74bn on business interruption schemes and bounce back loans.
In addition to these measures, HMRC have agreed to defer certain VAT liabilities and introduced a range of time to pay arrangements for businesses.
Add to this the restrictions imposed on landlords to enforce rent arrears or forfeit leases, and disgruntled creditors being unable to issue statutory demands or winding up petitions, this has created an artificial environment which has inadvertently kept many struggling businesses afloat and added to the increasing number of “zombie companies” keeping their head above water.
Turbulent times ahead …
As we move out of lockdown and the government support measures are gradually reduced, these businesses will face increasing pressures which all suggests a bumpy ride ahead?
Many directors have seen a building up of debt and witnessed a deterioration in their businesses over the last 12 months and recognise that their business model may not return overnight. Many sectors we are talking to quote an inadequate labour supply, erratic supply shortages and patchy demand as we inch our way out of lockdown. Consequently, many directors fear it may take several more months before they can see any sign of returning to profitability.
In addition to this, at some point Landlords and Councils will want to restart collecting rents… banks will want to start collecting the myriad of loans that have been granted… and HMRC will have to move back from supporting businesses to being tax collectors once again.
Throwing in the towel?
All of this puts huge pressure on business owners and directors who will question the merits of striving to repay those debts over many years or simply throw in the towel. This will become particularly pertinent for those businesses whose lockdown losses have largely been funded by increasing government debt who may look more favourably at the restructuring options open to them.
Hospitality, leisure, healthcare and the charity sectors have been amongst those worst hit industries along with manufacturing and retail to a lesser extent. Landlords have also been hit with significant accruing arrears and many high-profile failures and restructuring processes resulting in renegotiated rents going forward.
As in any recession, there will be winners and losers, and we are hearing many people conversely advising of significant profits and increased opportunities. However, the future for many isn’t necessarily rosy.
When the Merry-Go-Round Stops ….
We predict the coming months will see a steady increase in demand for restructuring services, rather than a tsunami of new work. It is often surprising how long businesses can limp along until finally forced into making a decision. We do not see the government allowing HMRC to adopt a heavy-handed approach to recovering unpaid taxes anytime soon, and what the government support measures have achieved is admirable… but whether businesses will consider spending 5-10 years repaying government sponsored debt remains to be seen.
There are also likely to be competing calls on working capital as we move away from funding pandemic losses versus the funding that will be required to fuel the post pandemic growth. Post pandemic funding moving forward will be more challenging than ever given the additional burden already taken on from the government support loans and the effects of deferring crown debt which recently regained an element of preferential status.
The government has so far appeared to print or borrow as much money as it wants at relatively negligible interest rates, but this does not come without long term consequences….
It will be interesting to see what happens when the merry go round stops?