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Covid-19 zombie companies beware

Debbie Cockerton explains why these are dangerous times for companies living on the edge – and their employees.

The epidemic is ongoing and while the government are attempting to bring the country out of lockdown in stages, we are still no clearer on how reopening will work and what affect it will have had on the economy.

I have previously written an article on ‘zombie’ companies; those companies who are able to service interest on loans but not able to repay the loans themselves or generate enough profit to enable a cash reserve or ‘rainy day fund’, therefore relying on credit facilities. These companies will be at an increased risk of folding during these tough times and in the aftermath of lockdown.

The government have put measures in place to stop viable businesses from shutting down, such as:

  • Small Business Grants Fund
  • Business Rates Holiday for Retail, Hospitality and Leisure Businesses
  • Bounce Back Loan Scheme (BBLS)
  • Deferral of VAT Payments
  • Coronavirus Job Retention Scheme

While the government are supporting businesses through this tough time it is hard to see any shutting down. The directors, as long as they are on PAYE, can furlough themselves and guarantee their wages as well as their employees. Debt repayment holidays can be requested from the bank or other finance provider and generally businesses are mindful of requesting repayment at this time, as they may rely on future business from that debtor to continue trading.

However, what will happen when the support is withdrawn and banks are no longer willing to delay debt repayments? The first thing that I believe will happen is mass redundancies; this could be down to reduced trade, lost contracts or that the furlough scheme indicated to the company that some employees are no longer required. This means that either the company will have to pay redundancies or look to liquidate their companies so that the Redundancy Payments Office can pick up the debt. We have seen numerous firms liquidate as a result of not being able to pay redundancies and other related expenses.

The Bounce Back loans that have been obtained by thousands of firms have no personal liability and are 100% backed by the government. The guidelines say that existing debt can be repaid using these loans should the interest rates be higher than the Bounce Back loans low rate of 2.5%. Could we see an increase of companies using these loans to repay debts that are personally guaranteed with a view to shutting and liquidating in the future? Only time will tell.

On 20 May 2020, the government introduced the Corporate Insolvency and Governance Bill in Parliament. It consists of six insolvency measures and two corporate governance measures. One of the measures being the temporary removal of the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency. While this is a good move by the government there are other antecedent transactions which will catch directors, such as preferences, which will almost certainly become a buzzword should directors use the bounce back loans to repay debts which are personally guaranteed.

So, in conclusion, while the government and financial institutions continue to support businesses affected by Covid-19, more and more companies will fall into the bracket of a zombie company. The loans are useful, but the thousands of pounds lost from the suspension of trading will surely have a long lasting impact on these businesses.

• Debbie Cockerton is a Partner at DCA Business Recovery

DCA operate the dedicated ICPA freephone number for all ICPA members and we are also able to hold all meetings remotely, which will increase the scope for assisting you. Call 0800 066 2540.

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