Zombie Companies: When Survival Becomes Liability

Zombie companies are no longer just an economic concern - they are increasingly a legal and restructuring risk point. For insolvency lawyers and practitioners, they sit in the uncomfortable space between commercial underperformance and formal insolvency, raising difficult questions around director conduct, creditor protection and the timing of intervention.

Typically defined as businesses that can just about service debt but lack the capacity to reduce it or invest for growth, zombie companies have proliferated in the UK’s low-interest, post-pandemic environment. In 2021, the ICAEW estimated that up to 20% of UK companies fell into this category. Recent economic pressures resulting from higher energy prices and an expected rise in inflation are likely to see the number of zombie companies increase and some to topple over.

High-profile examples illustrate this. Debenhams underwent multiple restructurings and CVAs before ultimately collapsing into liquidation.

Budget chain Poundland narrowly avoided insolvency and was sold for £1 in 2025, restructuring when it could no longer sustain its debts and costs. Fashion retailer Quiz entered administration for the third time in six years in 2025, highlighting how some businesses continue to hover close to insolvency, relying on repeated intervention or restructuring to survive. However, the issue extends far beyond the retail sector.

For accountants, lawyers and insolvency practitioners, a key question is at what point continued trading gives rise to legal exposure and whether earlier intervention could have preserved value.

From commercial distress to legal exposure

Zombie companies present a particular challenge because the deterioration is often gradual rather than acute. A business may continue to meet its debts as they fall due, at least in the short term, masking deeper balance sheet insolvency or structural unviability.

From an insolvency practitioner’s perspective, these businesses often present as cases where value erosion has occurred over an extended period. By the time of formal appointment, working capital has been depleted, creditor positions have worsened and restructuring options are more limited. The key issue is not simply whether the business was viable, but whether earlier intervention could have delivered a better outcome.

In many cases, warning signs are visible well before formal insolvency including persistent HMRC arrears, reliance on short-term funding to meet ongoing liabilities, and a continued inability to generate sustainable profits.

In this context, the legal focus shifts to director conduct. Under section 172(3) of the Companies Act 2006, directors must have regard to the interests of creditors where insolvency is probable. This is reinforced by the wrongful trading provisions under section 214 of the Insolvency Act 1986, which provide that directors may be held personally liable where they continue to trade at a point when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration.

Zombie companies sit squarely within this grey area. Their ability to continue trading can create a false sense of security, yet where there is no credible turnaround plan, the justification for continued trading becomes increasingly difficult to sustain.

In practice, courts will examine closely the steps taken by directors as financial distress emerges. Key considerations include whether:

• up-to-date financial information was maintained and reviewed

• professional advice was sought at an early stage

• active steps were taken to minimise losses to creditors

• certain creditors were treated preferentially

Failures in these areas may give rise not only to wrongful trading claims, but also to misfeasance proceedings (section 212 IA 1986), challenges to transactions at an undervalue or preferences (sections 238–239 IA 1986), and ultimately director disqualification under the Company Directors Disqualification Act 1986.

Creditor risk and recovery

While director liability is often the focus, zombie companies also create significant risks for creditors, particularly those who continue to trade with distressed counterparties.

The most immediate risk is non-payment following a subsequent insolvency. However, legal exposure can extend further. Officeholders (typically insolvency practitioners) may seek to challenge transactions entered into in the period leading up to insolvency, particularly where they have the effect of improving a creditor’s position relative to others.

Under the Insolvency Act 1986, this includes:

• preferences (section 239), where a creditor is placed in a better position than they would otherwise have been

• transactions at an undervalue (section 238), particularly in cases involving asset transfers

• extortionate credit transactions (section 244) in more extreme scenarios

Creditors may also face practical complications, including disputes over retention of title, attempts to recover goods, and competing claims over assets once a formal insolvency process begins.

Beyond individual exposure, there is also the broader issue of supply chain contagion. The failure of a zombie company can have a cascading effect, particularly in sectors with tight margins and interdependent relationships. This raises important legal considerations around contractual protections, including termination rights, credit controls and the use of security.

For lenders and institutional creditors, the position is more finely balanced. Continued support may preserve value in the short term, but it also increases exposure if the underlying business is not viable. Decisions around enforcement, standstill arrangements and restructuring must therefore be carefully calibrated.

For insolvency practitioners, these scenarios often translate into recovery actions post-appointment. Investigations into antecedent transactions, director conduct and creditor treatment form a core part of the role, with potential claims pursued to maximise returns to the estate. Zombie companies, by their nature, frequently present a pattern of incremental decisions which, when viewed collectively, may give rise to challenge.

Legal tools, restructuring options and the question of intervention

The UK insolvency framework provides a range of tools, typically implemented and overseen by insolvency practitioners, including administration, company voluntary arrangements (CVAs), restructuring plans under Part 26A of the Companies Act 2006, and the standalone moratorium introduced by the Corporate Insolvency and Governance Act 2020.

In practice, insolvency practitioners play a critical role in assessing viability, stabilising distressed businesses and determining whether rescue or realisation will deliver the best outcome for creditors.

The challenge, however, is not the absence of mechanisms, but the timing of their use. Zombie companies often persist because formal intervention is delayed, whether due to director optimism, creditor forbearance or a lack of clear trigger points.

This raises a broader policy question: should more be done to force earlier engagement?

There have been suggestions that enhanced reporting requirements, early warning systems or more proactive intervention by HMRC and regulators could help identify persistently distressed companies at an earlier stage. However, any such approach carries risk. Premature intervention may push otherwise viable businesses into insolvency, while increased regulation could create additional burdens without necessarily improving outcomes.

For now, the emphasis remains on judgement by directors, creditors and their advisers.

Conclusion: timing, judgement and intervention

Zombie companies occupy a grey area in UK insolvency law neither clearly viable nor formally insolvent, yet capable of drifting into a position where losses to creditors deepen over time. That ambiguity is precisely what makes them so challenging.

For directors, the risk lies in misjudging the point at which continued trading ceases to be defensible and becomes actionable. For creditors, it is in underestimating the exposure created by ongoing commercial relationships with financially distressed counterparties. And for advisers, accountants, insolvency practitioners and lawyers alike the task is to identify that inflection point early, whether in an advisory capacity or on appointment, and guide stakeholders through it.

The legal framework is already well established. The tools and remedies exist, as do the consequences where conduct falls short. The challenge is not one of legislation, but of timing and application including assessing whether earlier engagement could have preserved value and reduced creditor losses.

Ultimately, zombie companies are less about definition and more about decision-making: recognising when a struggling business crosses the line from survival to liability, and acting before value is irretrievably lost.

Shaun Walker is Corporate Restructuring Director at www.mercerhole.co.uk .