Return of the zombie clients

 

The number of “zombie” companies is on the rise in the UK and not only are they eating away at economic growth, accountants are increasingly dealing with the consequences.

Speaking at the recent AIMS Accountants For Business conference in Gatwick, Alan Limb and Peter Windatt of BRI Business Recovery and Insolvency said there were now 150,000 zombie companies out there and the rate of failure among them was at an all-time low.

“These are companies that are not going anywhere. They’re hanging on by skin of their teeth, they’ve sold the family silver and therefore there is nothing left to liquidate,” Windatt said.

“The turnaround of one through a pre-pack could mean the death of others.”

Continued...

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Comments

Venture Capitalist...    5 thanks

markfd | | Permalink

...wants to be able to buy distressed assets at vulture fund prices so thinks people desparately trying to keep their (often long-standing with many employees) businesses going shouldn't be allowed to?

Is that what this story actually says?

frustratedwithhmrc's picture

British attitudes    6 thanks

frustratedwithhmrc | | Permalink

I actually think that zombie companies reflect as much a part of the British attitude and desire to continue to survive despite any obvious hope of a future, whereas in similar circumstances an American might cut their losses, fire or make redundant any staff and liquidate all business assets to pay off creditors and hope for a little remaining capital to build up a business at some later date.

The net result of such an action is that losses to both creditors and shareholders are minimized, but their staff can find themselves unemployed in what (to them) seems unfair circumstance.

British small businesses tend to be more stoical, preferring to keep people on as long as possible, even against insurmountable odds in the hope of an upturn. This often leads to capital which could better be redeployed, being spent keeping often underutilized or costly staff in employment. 

Losses mount for both public (tax) and trade creditors and collapse becomes inevitable. All that has happened is that employees have had jobs for longer and the owner has avoided firing them or making them redundant.

In the UK failure is seen as a more personal matter than the vagaries of an economic downturn or technological change.

Often accountants are the ones who can inject the necessary healthy dose of reality to get a business owner to liquidate when the writing is on the wall, but all too often we are contacted too late, when clients have already passed the point of no return and there is nothing that can be done to save the business or any remaining capital.

Very, very sad.

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ireallyshouldkn... | | Permalink

Some people are just very bad at being in business and ought not be allowed out the house without an adult holding their hand. 

We do try to sack 'em, but often sympathy for their families/staff etc means we end up spending a huge amount of time trying to help out in the hope they will suddenly "get" how to run a business. It rarely works, generally we just try and make sure they are closing under their terms and perhaps taking a core of work back as a sole trader or similiar they can do themselves. 

ChrisScullard's picture

Education    1 thanks

ChrisScullard | | Permalink

ireallyshouldknowthisbut wrote:

Some people are just very bad at being in business

I couldn't agree more with this, although much of it is a total lack of education about what's requried to run a business.  I had one client who could be classed as a zombie (recently liquidated though).  The biggest problem with this, and other clients, is that they simply cannot get their head round what is the company's and what is theirs.  They see a few £k in the account, feel all pleased at how brilliant they are at running a business, then go on expensive holidays, buy cars, fritter it away, etc.  Then they get a nasty shock when a VAT, PAYE or CT bill turns up having spent the money that should have been used to pay it.

I honestly believe that the education system should include at least the basics on business administration.  I wouldn't expect many to remember any details, but for those who do then start businesses they may think 'hmmm, sure there was something about a VAT threshold/paying my staff taxes over/etc, better find out about this' and thus prevent huge problems in the future.

On the other hand some business owners simply see having money in the account as a challenge to spend it and cannot be helped!!

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ireallyshouldkn... | | Permalink

@Chris, I find those sorts of clients who just spend every penny are rather willfull in not 'understanding' I try very hard indeed to explain what is due, when, and why, what is their money and what is not, and whilst a lot of clients will take heed and keep asking questions until they understand, the 'zombies' will just spend every penny in the account, no matter what you say or what dire warnings you issue.  

Often there is a good business trying to get out of the bad business owners hands.

Zombies are not new - covered a number of times before ...    1 thanks

JC | | Permalink

This is entirely symptomatic of Government interference in trying to arrange a 'soft-landing' for the recession and in the process penalising everyone else by mutualising the pain for all over an extended period

Recessions are all part and parcel of the cycle and their purpose is to 'kill off' the unviable (business etc.) so that new re-generation can take place.

The equivalent in nature are forest fires which get rid of the old growth and allow new shoots to emerge.

The recent recession should have done this and been a short sharp exercise. However, because of continual on-going bail-out's for everyone from countries (Greece) downwards (banks right through to artificially low interest rates benefitting those in negative equity with their mortgages) we have ended up with all manner of zombie countries/businesses/individuals.

Furthermore, everyone else has paid the price for the Governments largess

For goodness sake, stop underwriting all this with taxpayer’s money and just let this lot go bust in the 'normal' course of events, which would benefit everyone in the long run

Finally, it has got to the stage with some EU countries that sooner or later their debts will have to be written off, because they absolutely no chance of paying them off - basically they should never have been lent the money in the first place, except where ideology and economic clash, as with politicians

Jon Moulton    2 thanks

Alan Limb | | Permalink

In our presentation referred to in the article we shared Jon Moulton's view that we do need a situation where bad businesses fail, otherwise the economy will stack up with progressively weaker business models and growth will go into reverse.

Mr Moulton's plan for the acquisition of Rover involved the preservation of those parts that were profitable and the wind down of those that weren't. This was rejected in favour of the "Phoenix 4" whose strategy effectively resulted in the wind down of the whole of the business over the next few years. With hindsight, which would have been the better option?

As an Insolvency Practitioner I often meet Directors who can't run a bath, let alone a company. In view of this, and the relatively low percentage of Directors of Insolvent companies who are disqualified, perhaps people should have to obtain a Director's Licence before they can act and pass a Company Theory test in order to do so. There could be a points based system on a sliding scale for failure to comply with the Companies Act and other legislation (please, no comments about getting someone else to take your points for you) with disqualification occurring automatically over a certain points threshold. Existing Directors could either be grandfathered in or be given a period of time to qualify. Does anyone have a better idea?

In my opinion it started with Thatcher ......    1 thanks

keanes | | Permalink

who encouraged every Tom, Dick & Harry to believe they could run their own small company, without the first idea of what was involved. Now everyone believes that small business owners make tons of money, and want a piece of it. Successive governments have encouraged this attitude, and tried to make out that running your own business is easy, without mentioning PAYE, VAT, company law & every other law they can dream up (usually with a fine for non-compliance) - probably because no policitian or government adviser has actually done it themselves!

I would require companies to have a minimum share capital of at least £25,000, so that anyone thinking of setting one up has to be really serious, and be prepared to commit their own money instead of passing the risk to suppliers and government bodies. I think it would make more people think before starting these companies, which are obviously going to fail before they get off the ground because they are underfunded from day one. They might also take advice before they start rather than approaching an accountant for the first time 18 months after they start, when it's often too late.

Zombie Companies    1 thanks

Mathswizard | | Permalink

Is it not about time that some degree of competance was shown before anyone is allowed to run  a business ?  After all, the clean up needed afterwards can be very costly, which further undermines the economy.  I have clients who are almost illiterate, okay I know and can cope, but HMRC allowed these people to register as either self employed or partnerships, and giving them responsibility they did not grasp in any way shape or form.  Returns are not submitted when they are supposed to be as they do not understand, they work very well, don't get me wrong, but admin ?, no way.  Then we come to incorporations, people who, as ireallyshould said, should not be allowed out without an adult, pay for an off the shelf company or get one incorporated for a tiny fee, they use the company bank account as their own personal piggy bank and then wonder why the company is in debt.  The situation gradually worsens and they just hang on and on, not understanding they are actually committing an offence by continuing to trade whilst insolvent.  How do we get through to them, surely some ability should be established before we end up at the point of no return ?

the accounts are not always reliable of course

The Black Knight | | Permalink

Given that many small company accounts that are filed at companies house are complete rubbish before you even look at the numbers, I would suggest any data used is wholly unreliable.

 

Brian Ogilvie's picture

Jon Moulton

Brian Ogilvie | | Permalink

The example of the Rover group mentioned above presents the perfect example.I remember at the time Moulton and his colleagues being castigated for being asset strippers,capitalists,only interested in money etc.

It was an infantile and baseless campaign led in the main by the Trade Union (TGWU ?) .......the Phoenix 4 were treated as heroes/saviours etc and look what happened.

Hm,I wonder what those Union leaders have to say now ?!

Brian Ogilvie

 

 

Yes the last government made a blunder saving all the banks    5 thanks

philfromleeds | | Permalink

I remember thinking at the time when Gordon Brown saved the banks he should have let one major bank fail. It would have been a lot cheaper just meeting our deposit guarantees. Then the other banks would have thrived. I would have let the RBS fail.

Failing banks    1 thanks

frankdavid | | Permalink

Would have been interesting if a bank had been allowed to fail.  The directors would then have had to worry about finding the money to cover the losses when running an insolvent loss making business and less time worrying about whether they would lose their knighthoods. If they knew a bank could fail they may even have been more prudent when buying junk debt for daft prices and granting 110% mortgages on overvalued houses on self cert mortgages.

 

As it was the heads of Lloyds XSB,  HbxS, Northern Roc, RSB  (no libel intended) walked away scot free with huge pensions intact.

 

Whilst having a rant  may also ask how may banks were saved by the requirement to have an audit ? answers on a pinhead please

 

 

 

Self employment

frankdavid | | Permalink

I understand that in France a licence is (or was) required to become self employed, only granted after about 3 weeks training in business skills. Problem is that many of the self employed (including me) are unemployable so would be forced into the black economy or job seekers allowance

 

Yes but ...    2 thanks

dwgw | | Permalink

... it's all very well castigating people for not being adept at business.  In a differently ordered economy I dare say many of those currently self-employed would have been employees but years of streamlining, down-sizing or whatever management euphemism you prefer have left a lot of people with no choice but to start their own business.

Those constantly looking at the big picture risk not seeing the trees in the wood.  People have to make a living.  If employers have no room for them, what else are they to do but start their own business?  Then they often find a company is required in order to win work, not least because of companies unwilling to risk losing a status enquiry by engaging anyone that doesn't trade via a company. 

Obviously I'm talking about struggling (getting tired of this "zombie" cliche) microbusinesses here, not bigger failing companies.

Frankdavid is right

philfromleeds | | Permalink

To be perfectly frank and honest you are so right. These rich buggers who never would vote Labour were saved by Gordon Boy definitely not Golden Boy the plonker (He who sold the gold and bought RBS). Gordon did not have the Midas touch but Blair has that. If ever these two ever become enobled It will be a sad day.

carnmores's picture

for out and out crass comments

carnmores | | Permalink

this thread takes some beating.....