Increasingly, financial directors are being faced with the same dilemma. A key customer keeps asking for extra time to pay its invoices. As a result, the customer owes a material part of the supplier’s book debts. The supplier is now so exposed that it is scared to take enforcement action fearing that the customer will go bust. The director may now be asking himself: “Have I fallen foul of a zombie company?”

So-called ‘zombie’ companies are businesses making little or no profit, which are kept in business by either their banks relaxing the terms of their credit facilities, an extension of credit agreed with suppliers, entering into time-to-pay agreements with HMRC, or a combination of all three. These companies accrue so much interest or costs that they have very little prospect of being able to repay their debts.

Banks are showing remarkable reluctance to push struggling companies into insolvency. Yes, they are unenthusiastic to lend new money, but the value of these companies’ assets, which have been used to secure the lending, has often materially reduced and banks would prefer to wait to enforce, hoping values rise.

Suppliers have become so exposed to these companies that they cannot afford for them to fail. Unfortunately, this has a knock-on effect down the supply chain as each debtor in turn is now deferring payments and spreading the curse of the zombie company.

What can you do?

Credit Control

The best line of defence is to avoid unpaid debts in the first place. A robust credit control policy should be a mainstay of a well-run company. There are a number of elements to this. Firstly, consider taking out credit insurance. This is becoming increasingly popular but exclusion clauses must be reviewed. Also set credit limits for individual customers.

Use a carrot and stick approach – the carrot is a discount for early settlement and the stick is interest for late payment. It’s also worth registering at Companies House for its webcheck service to monitor filings from suppliers and customers.

Retention of Title (RoT)

An RoT clause should be an essential part of your terms and conditions. However, a well-drafted RoT clause will be of little use unless it is properly incorporated into commercial dealings. At the very onset of a commercial relationship it is important that the customer signs a copy.

Keep it confidential

You may have concerns over a supplier/customer, but it is not a good idea to broadcast these. For example, in one of the earliest cases involving use of emails, Norwich Union was held to be vicariously liable for alleged defamatory comments made by its employees about Western Provident Association (WPA). Norwich Union employees were using the internal intranet to circulate emails among themselves alleging that WPA was in financial difficulties and that the then DTI was investigating WPA. The case was settled out of court with an apology and damages.

Spread the risk

Lastly, if a company is beholden to one supplier or customer, what is the Plan B if they were to fail? M&A specialists report more companies are exploring opportunities for vertical integration. A distressed supplier may be receptive to an acquisition approach from a customer. —