Anyone who has watched a zombie movie will tell you that there is only one thing to do when confronted by a zombie – run.  Like the zombie of the screen, zombie companies exist somewhere between the living and the dead.  A zombie company continues to trade but has not generated sufficient cash flows to service its debt for 3 years or more.  It can remain condemned to financial limbo for many years unless its creditors take action to either wind it up or resuscitate it.

 

Reviving a zombie company is daunting because it requires new money and no investor wants to pump cash into a limping business.  The zombie can obtain funds if it has valuable and fairly liquid non-core assets that can be disposed of in the short-term.  Failing that, the zombie can approach providers of capital like shareholders, commercial banks and private equity or debt funds but convincing them to put money into an over-leveraged company is an uphill task.

 

The second option of winding up a zombie company is not a walk in the park either.  The process can be costly and time-consuming.  To exacerbate matters, stakeholders such as employees and small or unsecured suppliers may seek injunctive orders from court to stop the sale of the business or its significant assets.  

 

The complex decision of whether to revive or kill the zombie should be taken sooner rather than later.  Delaying the decision allows the zombie’s assets to deteriorate as they tend to be in a poor state of repair.  Furthermore, over time, the zombie erodes its goodwill with customers, creditors and staff due to a litany of broken promises.  The decision on what to do with a zombie should be informed by an in-depth, independent and professional analysis of its financial status, market positioning and commercial prospects.

 

One tool that is available to a zombie company is the pre-insolvency moratorium introduced in 2021.  It gives a company respite from creditor action for a period of 30 days which can be extended by the courts.  A company’s directors can apply for a moratorium by filing the requisite documents in court including an explanation of why the moratorium is desirable and how it will allow the company to either reach an agreement with creditors or enable an efficient insolvency process.  A moratorium is supervised by a monitor who must be a licensed insolvency practitioner.  The monitor is required to file a statement in court confirming that the objectives of the moratorium are likely to be met and that the company has adequate funds to keep running for the duration of the moratorium.  A pre-insolvency moratorium offers an opportunity for turnaround if it is still early enough to salvage the situation and if the company and its stakeholders capitalise on the moratorium window to collaboratively develop a workable plan.  If the zombie’s demise is inevitable, then the moratorium can help the stakeholders agree on how it can exit in a way that maximises recoveries for creditors to shield them from suffering a similar financial fate.  

The article was published in the Business Daily and can be accessed here.