ICAEW.com works better with JavaScript enabled.

Business rescue: are zombie companies on the rise?

Author: ICAEW Insights

Published: 15 Apr 2021

There are a high proportion of zombie companies in the UK. The COVID-19 pandemic has created the perfect environment to create more.

The UK has had a zombie problem for some time now. Companies that simply exist, shambling onwards without ever turning a profit or contributing meaningfully to the economy. These ‘zombie companies’ have played a significant role in keeping UK productivity low and it’s only getting worse.

According to a report by the conservative think tank Onward, between 1% and 4% of companies have been ‘zombified’ since the start of the pandemic, bringing the total number in the UK to more than 20%. 

The effect this could have is potentially huge. Onward predicts that if nothing is done to reduce the number of zombie companies in the UK economy, business investment will reduce by £42bn a year. Employment growth will slow, resulting in 400,000 fewer jobs. Lower productivity will lead to £41bn lost growth over five years. 

Part of the problem, says Alessandro Sidoli, insolvency practitioner for Kay Johnson Gee LLP, is that issuing winding-up petitions for these companies is a lengthy and costly process, which might not be viable for HMRC to pursue. 

“It all points towards a continuing increase in zombie companies,” he says. “But then again, I don't rule out the government potentially bringing in a different process to deal with them if the number starts to become too big.”

Government measures ease the pressure 

COVID-19 has reset the clock for many existing zombie companies. Any pressure they were under from HMRC or creditors has been eased as the focus has shifted onto relief measures. Those measures gave zombie companies the means to keep shuffling on. 

“You've probably got a much longer period before they feel under pressure to do something again,” says Sidoli. “These types of companies may not be a priority for HMRC for some time.”

Companies House has also effectively stopped strike-offs for any companies with a Bounce Back loan, providing further protections for zombie companies. “It is going to be difficult to fix,” Sidoli says. 

This might, in part, explain why insolvencies haven’t increased as expected in the first half of 2021. The companies coming to insolvency practitioners have taken government support to keep going for now, but are forecasting more trouble ahead. “If they continue, it means the owners will have to pump in a lot of their own money to keep going. Many of the companies we have advised recently have been operating for more than a decade, they’re good companies that have been profitable. But they don't see the value in continuing.”

These are the companies coming to insolvency practitioners at the moment. A number have money to pay creditors thanks to the coronavirus relief measures. “These companies wouldn't have been going down 12 or 24 months ago.”

Contracting companies affected by the changes to IR35 are also closing down, some of which are still solvent. That is likely to continue for the next six months, as directors move onto their new pay arrangements and see how it affects their income. “They will either decide they need to do something with the company, or they’ll become another zombie company.”

Myriad scenarios in the insolvency market

There is so much uncertainty in the market at the moment that insolvency practitioners are having to advise clients on all types of restructuring or insolvency options due to the myriad of scenarios that could unfold over the coming months. 

“I am presenting all the options to clients at the moment, but it comes down to what they believe their market is going to do in the future and how their company is prepared to respond,” says Sidoli “If they have a business that has a small amount of Bounce Back loan left, they have costed the running costs through to May (when they think their main trade volume will return) and they think they're going to be prosperous, they're looking at voluntary arrangements as a way of dealing with the historic debt. 

“At the same time, what happens if they don’t get a prosperous summer, in hospitality for example? We can tailor a CVA to try and be as fair and flexible as possible. But ultimately, the directors need to decide whether they want to carry on the company. And if you do, you need to plan for certain scenarios to ensure you’re protecting the company and creditors’ positions.”

That complication and the number of support measures still available has resulted in many business owners holding back to see what happens. They need to be confident in their business prospects to go through a CVA. “Because it's an uncertain business environment, people just have to make that choice about whether they want to keep trying or not.”

This brings us back to zombie companies. If you can hold on and continue to muddle through for the foreseeable future, would you shut up shop? In reality, it’s better to take on the services of an insolvency practitioner early in the process, but it may seem easier to shamble on for eternity.

Join the ICAEW Restructuring & Insolvency Community for guidance, support and representation to insolvency practitioners. Free to all those IPs licensed by ICAEW.

Further reading: