Contrary
to the predictions of many commentators at the start of the credit crunch, the
continued recession has not led to a surge, but a decline, in corporate insolvencies and numbers now are now at their lowest level since 2008[1].
Instead
there has been a rise in the number of so-called ‘Zombie’ Companies[2].
These companies are carrying a heavy debt burden, but with few assets, that
financiers are allowing to continue to service their interest charges without
reducing their debt instead of pursuing any formal insolvency procedure against
the company due to the poor prospect of any dividend.
Zombie
companies need expert insolvency and financial advice now if they are to
survive the much anticipated economic recovery. Restructuring existing finance
arrangements is a key strategy for a Zombie company and the company’s
accountants should be encouraging directors to think seriously about their
present situation as well as preparing for their future.
Outof court restructuring can be either by a consensual route with the financier
to obtain the relaxation of financial covenants, payment holidays, revised
payment plans, standstills or other amended terms or by using the companyvoluntary arrangement regime under the supervision of an insolvency practitioner which would give the company the necessary time and flexibility to
resolve its financial difficulties.
Directors
of Zombie companies also need advice from insolvency practitioners and lawyers
on the risks of trading in this twilight zone of the company being insolvent on
any of the conventional insolvency tests or if the directors ought to have
known the company was insolvent (particularly if they are concentrating on
meeting the cash flow test at the expense of satisfying the asset test). It may
be crucial in the event of any investigation of the conduct of a director and
defending any director disqualification action in the event of the company
entering administration or liquidation in the future, if it can be shown that
the director was taking professional advice throughout this time.
Rather
than wait for what many insolvency experts view as the inevitable collapse of
Zombie companies, now is the time for insolvency practitioners and financiers
to become involved in the strategic planning of this crucial phase of SME
survival.
For more information please
feel free to contact Ambuja Bose, Partner, on 0207 841 0390.
