The hidden cost of business rescue: How zombie companies form

Stephen Grootes speaks to Gareth Cremen, a partner in Cox Yeats' Business Restructuring, Rescue & Insolvency team, about South Africa's business rescue framework and how companies end up relying on state funding without any prospect of financial improvement.

Listen to the full interview in the audio player above.

Business rescue & zombie companies

Cremen explains how the purpose of business rescue is to rehabilitate companies that have fallen off financially, and return them to a profitable state, avoiding liquidation. He emphasizes how the process is not meant to keep a failing business on a lifeline with no chance of long-term recovery.

“It was not designed for terminally ill companies or for companies to be put on a life support machine. It was designed to rehabilitate, and if it couldn’t rehabilitate, it had to result in a better return than immediate liquidation." - Gareth Cremen,Cox Yeats' Business Restructuring

The term “zombie company” is used to describe a company that is currently being rescued but lacks the potential or positive trajectory to return to its former success, becoming reliant on state support to keep the business “alive”. In some cases, the process is delayed due to ongoing legal matters and creditor disputes, keeping the zombie company in limbo while still receiving funding.