How can we avoid a zombie company apocalypse?

Accountancy Today takes a look at the rising level of company insolvencies, with ‘zombie companies’ facing major uncertainty as Government support fades away, what can be done to limit the damage?

Some 1,207 companies became insolvent across England and Wales in June 2021. It marked a 19% rise from May’s 1,011, and a 30% jump from April’s 925. Q2 followed a similar pattern as cases jumped to 3,116, a 31% increase when compared to the previous quarter. 

Government support during the Covid-19 pandemic has staved off a mass extinction of British businesses thus far. However, many believe it has simply created a “zombie” apocalypse further down the line, of which we are about to hit. So called “zombie companies” are uncompetitive or indebted organisations only able to pay the interest owed to their creditors. 

Government support in the form of furlough, business rates reductions, and moratorium extensions have unquestionably and crucially supported thousands of firms throughout the pandemic, but have they also been falsely propping many up?

Lord Callanan, minister for corporate responsibility, says that the Insolvency Service has extended a number of vital measures until 30 September 2021 “to give businesses the extra breathing space they need as we cautiously reopen the economy”. He adds: “With the threat of aggressive creditor action and insolvency eased, companies will be able to focus all their efforts on their recovery.”

While this plan of action could provide crucial time for those companies on the brink of revival or survival, what happens after the support fades away at the end of September? “As government support measures tail off… I’d expect that formal insolvency numbers will continue to rise,” says Chris Newell, managing director at independent advisory firm Quantuma

For Newell, loans taken out “via the emergency loan schemes and the level of HMRC debt, which has significantly risen,” are two key issues facing companies. He adds: “There are still restrictions in place that prevent creditors and landlords taking legal action against companies that owe money, but this will be a challenging period for businesses as they seek to bounce back as quickly as possible while walking the tightrope of keeping their creditors at bay.”

Newell’s prediction of rising insolvencies coinciding with waning support measures resonates with many, including Rick Smith, managing director at business recovery advisory group Forbes Burton. Smith agrees that the ending of schemes such as furlough, “which is a major prop for these companies”, will spell an end for the zombie companies in the run up to Halloween. 

However, Smith also feels the approach of HMRC will have a vital impact, adding: “When HMRC begins to start taking a harder line on collecting tax arrears, this will no doubt also begin a cull of these zombie companies.” 

A spokesperson for the tax body tells Accountancy Today that “protecting livelihoods remains our priority, as it has been throughout the pandemic”. This has been shown by a softer approach to tax deadlines, alongside continued statutory demands and winding-up petitions introduced by the government. They add: “We will always work constructively with customers to avoid the need for insolvency and will only take action if a customer does not respond or engage with us.”

One way of staving off the “zombie cull” in the eyes of Smith is “keeping HMRC off companies’ backs for as long as possible and applying less pressure”. This can be achieved by offering businesses Time To Pay arrangements, where they can pay their tax in arrears. But what can advisory firms do to provide the best outcome for, and possibly even save, a number of these frozen zombies?

Newell says that advisory firms “have a vital role to play providing support to companies navigating through these difficult waters”. These duties can range from “providing guidance around cash flow forecasting”, to “arranging repayment plans with creditors” and organising “formal insolvency options”. Advisors could also be key in aligning firms with potential HMRC Time To Pay agreements, leading Newell to conclude that “the best chance for survival is for companies to take early advice from professionals.”

Smith concurs that “in some situations the zombie companies may well be able to be saved”, providing hope to those stuck in the debtor limbo. He adds: “Thorough analysis also needs to happen, looking not just at the company accounts, but their business and marketing strategies too in order to seek whether there is any real and genuine viability for them to continue. The market conditions have changed vastly since the start of the pandemic and assessment needs to reflect that.”

With the lifting of Government support measures and the reopening of society following the global pandemic, October could bring a host of challenges for businesses across the UK. The number of zombie companies has swelled throughout the past 18 months as debtor protections have propped sways of firms up for months on end. While support measures such as extending furlough and the moratorium could postpone the “zombie cull” until after Halloween, it seems an inevitable issue that must be addressed.

However, utilising advisory firms, alongside phased support through increased Time To Pay schemes, could at the very least provide a better outcome for companies’ stakeholders. Strategising with an advisor could even bring some zombies back from the dead. Action will need to be taken soon however, as Smith warns: “We are sitting on the precipice at the moment with many companies simply waiting to drop over that cliff edge.”

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