A zombie company is a new term for an old situation: a company that may still be trading, but only just. Although not financially viable, it continues to trade because the banks, other group companies or investors are propping it up – and probably can’t afford to pull out.
It may make enough to maintain its interest repayments every month but it won’t have sufficient capital to invest and grow. What is more, if you have traded with it, it may not have the money to pay its debts.
If you are concerned about a zombie company you are not alone. In fact, according to BBC News, there are around 146,000 of these types of business in the UK and around 50,000 could collapse if interest rates rise.
How a zombie company can be a killer for your debts
Whilst a zombie company continues to trade, you can still put pressure on it to pay its debts to you. But if the banks suddenly pull the plug, you will generally only be paid a percentage of your claim as an unsecured creditor, if anything at all.
When a zombie company goes into administration, an insolvency practitioner will generally sell all the company’s assets and use the proceeds to make a distribution to creditors. As companies usually go under because they are in severe financial difficulties, it is rare that you’ll be paid 100% of the debt.
The situation is even worse if you are not a major creditor, as all creditors will be offered a pro rata percentage of the overall debt owed. So for example, if a zombie company owes the bank £1million and owes you £20,000 and these are the whole of the company’s debts, the bank would receive 98% of any payout, while you would only get 2%.
How to protect yourself from a zombie company
The first step is to make sure you know who you are dealing with when you start trading with them. We can point you in the right direction for due diligence and you can also download our free guide to Know Your Customer.
If you are still unsure whether you are about to trade with a zombie company, ask for payment upfront. Alternatively, use a retention of title clause so you keep legal ownership of the goods until paid for.
If you think you might be in trouble with a zombie company, please contact our Commercial Debt Recovery team on 01332 340 211.