THE BUSINESS DOCTOR | In the UK there are estimated to be as many as 108,000 Zombie Companies.
Zombie: A soulless human being that exists in a state between life and death or a type of Tokoloshe.
Zombie Business: A company only able to service interest on its debts but not the debt itself.
In the UK there are estimated to be as many as 108,000 Zombie Companies, which are only able to service the interest on their debts but not repay any capital or reduce their borrowing.
The government is content as trading companies boost employment figures while Banks want to continue to receive monthly interest payments so that they don’t have to show these loans as bad debts which in-turn boosts their balance sheets.
Directors are hoping that the economy will improve and that their companies will eventually be able to pay back the capital elements of their loans and overdrafts.
But, hope is not a strategy!
An increase of just 0.25% in the Bank of England rate will prevent many of these companies from continuing to service the interest on their debts, which will in turn force the banks to take recovery action.
It is important for directors to consult with a qualified professional to understand all of the available options to rescue the company.
One solution is for the Company to enter into a Company Voluntary Arrangement (â€œCVA”), which is a compromise agreement with its creditors. Creditors agree to write off a portion of the outstanding debts in exchange for the Company agreeing to repay quicker than if the Company went into Liquidation.
A CVA can only be entered into with the assistance of a Licensed Insolvency Practitioner (â€œIP”) who will act as Supervisor, ensuring that the terms and conditions of the CVA are adhered to by both the Company and its creditors.
A high proportion of CVAs are successfully concluded, leading to saved jobs, restructured companies and appeased creditors.
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