A zombie company earns enough to service its debt and never enough to repay it. The label is journalistic, but the legal exposure it describes is precise: once directors know or ought to conclude there is no reasonable prospect of avoiding insolvent liquidation, continuing to trade can make them personally liable to contribute to the company's assets.
What the term actually describes
There is no statutory definition. In practice a company is described this way when it meets interest but not principal, has no realistic refinancing route, holds no meaningful cash buffer, and is sustained by forbearance — from a lender, from HMRC, from a landlord or from suppliers — rather than by trading performance.
The condition is not the same as insolvency and it is not the same as unprofitability. A company can be profitable at the operating line and still be a zombie if the capital structure above it cannot be serviced. Equally, a loss-making company with cash and committed facilities is not one.
What makes the condition dangerous is that it is stable. Nothing forces the question, so it does not get asked — until an interest rate moves, a facility matures or a single customer leaves.
Wrongful trading
Section 214 of the Insolvency Act 1986 is the provision directors need to understand, and it operates only after the fact — the court may make a declaration where "the company has gone into insolvent liquidation" and the director "knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration".
Two features make it more demanding than directors expect.
The test is partly objective. Under section 214(4), the director is judged against the general knowledge, skill and experience reasonably expected of a person carrying out the same functions, and against the general knowledge, skill and experience that the director actually has. Inexperience is not a defence; expertise raises the bar.
The defence is demanding. Section 214(3) protects a director who took "every step with a view to minimising the potential loss to the company's creditors" after the point of realisation. Not reasonable steps — every step. And the clock starts when the director knew or ought to have concluded, not when they accepted it.
That gap between "ought to have concluded" and "did conclude" is where liability lives. A board that received a forecast showing no route to repayment and carried on regardless has a date stamped on the file.
The creditor duty
Section 172 of the Companies Act 2006 requires a director to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to long-term consequences, employees, supplier and customer relationships, community and environmental impact, reputation, and fairness between members.
Section 172(3) then carves out the critical qualification: "The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."
So the duty to shareholders yields to the interests of creditors in certain circumstances. When that duty is engaged was the question before the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25, decided on 5 October 2022 — a case concerned with whether the trigger is a real risk of insolvency, as opposed to a probability of or close proximity to it. Directors of a financially marginal company should take the specific point advisedly rather than from a summary, but the structural message is not in doubt: as a company deteriorates, the interests the board must serve shift.
Honest diagnostics
Five questions settle whether a company is in this category, and a board can answer them in an afternoon.
- Interest cover. What multiple of interest does operating profit cover, and what does it become at a rate one or two points higher?
- The repayment route. Over what period does the current plan actually repay principal — and if the answer is "on refinancing", what specifically supports the assumption that a lender will refinance?
- Forbearance. Which creditors are being paid later than their terms, and is anyone being paid only because they have not pressed?
- Headroom. How many weeks of cash exist without new facilities, and what single event removes it?
- Covenants. When is the next test, on what forecast does it pass, and how much does that forecast have to be wrong by to fail?
If the honest answers are uncomfortable, the response is not optimism. It is a documented plan with dates, decision points and a board that reviews it, because contemporaneous documentation of the reasoning is what section 214(3) is ultimately assessed against.
The accounting consequence
This is also a financial reporting issue. The going concern assessment is not a formality, and a company in this condition needs a supportable assessment covering at least twelve months from approval of the accounts, with the judgements and any material uncertainty disclosed. An auditor will test those forecasts against the same questions above, and the assessment that was never written down is the one that causes the problem at year end. Our guide to audit covers what that involves.
Acumon works with directors of financially stressed businesses through business health checks, management accounts and financial modelling, with risk management and interim CFO support where the board needs capacity. If nobody can say how the principal gets repaid, that is the question to put on the next board agenda in writing.