Wikipedia describes zombie companies as “indebted businesses that, although generating cash, after covering running costs, fixed costs (wages, rates, rent) they only have enough funds to service the interest on the loans, but not the debt itself. As they generally depend on banks (creditors) for their continued existence, effectively putting them on never- ending life support”.
In relation to humans, the Cambridge dictionary of a zombie is “a frightening creature that is a dead person who has being brought back to life, but without human qualities. Zombies are not able to think and they are often shown as attacking and eating human beings”.
Like these human zombies, zombie companies, because they lure unsuspecting creditors and lenders into a false sense of security, could potentially cause a similar destructive pattern by “attacking and eating” other companies.
Before the commencement of the COVID-19 pandemic and the crisis that caused the South African economic landscape to slide, our local economy was already awash with companies that had “no more energy” and carried the brunt of the pre-COVID- 19 South African economic status of unemployment, potential downgrades and an economy that had been obliterated by the Zuma years. Just when you thought it could not get any worse, it did. It is anticipated that our present unemployment rate of 30.1% will escalate to an unprecedented rate of just short of 40%. In fact, it has been mooted in the media in the last 24 hours that the unemployment rate may rise to as high as 50%!
Zombie companies have then exasperated the situation by taking advantage of promised government bailouts and payment holidays from banks and other financial institutions. What was already a bloodbath in the making before the onset of COVID- 19, and being a commercial accident waiting to happen turned out to be even more disastrous. Companies with debt at already unprecedented levels at the commencement of lockdown have jumped at the opportunity to make use of these generous offers of reprieve under circumstances where they were already under the influence of the drug called “over indebtedness”.
The lowering of interest rates and extraordinary sympathetic market conditions have opened the door for zombie companies to take advantage of the situation and to incur further credit by entering into loans at low interest rates.
What was offered to them was a legal concoction of further debt, lower interest rates and an opportunity to dig themselves into an even bigger hole. The net effect of this is that financial distress that was being experienced by companies pre-COVID-19 has turned into a financial disaster because of, most probably, further intentional reckless conduct by its management and directors in direct contravention of the Companies Act, under the guise of COVID-19 where they threw caution to the wind and did not take the necessary pre-cautions (especially where their pre-COVID-19 over indebtedness was already known to them).
Trading became impossible during lockdown and this was completely unforeseen and many companies already under the influence of over indebtedness became “zombies” during COVID-19 and will never recover from the recent overdose of debt afforded to them by the system. Like the unprecedented lockdown regulations forced us to exercise social distancing between humans the commercial “social distancing” that became an unintended consequence of COVID-19 was the ideal opportunity for zombie companies to operate unnoticed and to the detriment of its unsuspecting creditors.
The most unforeseen consequence of this COVID-19 pandemic was the inability to conduct business as normal and for zombies to have access to capital and take such loans under circumstances where the sustainable repayment of such loans were not possible. This was nothing less than commercial suicide
It is estimated that most South African medium enterprises, have under normal circumstances sufficient capital to sustain them for three months, and the COVID-19 lockdown exhausted whatever resources many such companies had.
CIPC indicated in notices issued during the lockdown that they would be lenient on companies that may be trading under insolvent circumstances but under circumstances where directors of zombie companies incurred further debts knowing that they could not repay such debt, the position might be different. The reality of zombie businesses is that weak lending policies by banks and financial institutions were exploited.
The impact that zombie firms and companies will have on healthy businesses can only be curtailed by using the available tools that are in existence in legal frameworks provided by the business rescue provisions in terms of the Companies Act and the formal laws of insolvency.
The biggest challenge to restructuring professionals is to create the understanding with businesses that cooler heads are needed to prevail in times of financial distress and that the necessary medicine to be taken may not necessarily be something palatable.
We have the necessary expertise to assist with restructuring outcomes that will ensure a better outcome than to wait for the position to get worse and worse and to such an extent where there is a complete meltdown where healthy businesses are completely “eaten up” by the zombies and where there will be no winners!
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