Richard Fleming wasn’t expecting to pitch for business during his summer holiday in Croatia. After all, the restructuring expert’s phone hardly rang over his last break as advisory work dried up.

But this year his trip to the Adriatic Coast was interrupted six times by large companies on the brink. And his phone hasn't stopped buzzing since.

“I’ve been in this market for 33 years and every ten years or so you get a cycle,” says Fleming, who runs Alvarez & Marsal’s restructuring practice in Europe.

“It’s been 14 years since the last one, so there was always going to be a tougher period. It’s kind of overdue.”

With energy bills shooting up, interest rates on the rise and a recession looming, it’s perhaps no surprise that more firms are entering the danger zone.

But unlike previous downturns, experts believe a reckoning is coming for one type of business in particular: the “zombie” company.

Though no official definition exists, generally speaking, zombies are businesses trapped in limbo. They often make just enough profit to service the interest on their borrowings but too little to actually pay the debts down.

And since the financial crisis, their numbers have been swelling.

A report by the think tank Onward estimated that one in five – or more than one million – British companies were zombified by September 2020. The situation has not improved since.

More recently, Begbies Traynor estimated nearly 600,000 businesses are in “significant financial distress”, with many thought to be zombies.

Normally, these failing businesses would have been crushed in the meatgrinder of competitive markets, their assets and workers reabsorbed by more dynamic rivals.

But a decade-plus of easy money, underpinned by rock-bottom interest rates, has allowed them to continue lurching onwards.

Professor John Van Reenen, a productivity expert at the London School of Economics, says this even continued through the pandemic, when generous government support gave the teetering firms a stay of execution.

Yet with the Bank of England having hiked interest rates from 0.1pc to 1.75pc in less than a year, a reckoning is coming – and the result could be a tsunami of insolvencies and job losses.

“Zombie companies have been kept on this kind of artificial life support by low interest rates, and some of the banks have been reluctant to call in loans,” Reenen explains.

“Now interest rates are being jacked up, and with costs rising and a recession coming, it almost certainly means a lot of them are going to find it very hard to stay in business.

“People have been focused on things to help households, which is right. But I think it's been a bit lost that a large number of firms are also going to struggle to survive in this climate.”

On the ground, insolvency advisers say there are already signs that the dam is beginning to break. That is borne out by official figures, which showed insolvencies in July leapt to 1,827, an annual increase of 67pc.

It means insolvency advisers are preparing for a deluge of work over the coming months following an unusually quiet two years.

Julie Palmer, a regional managing partner and insolvency practitioner at Begbies Traynor, says a helpline run by her firm is getting an increasing number of calls from business owners “wringing their hands in exasperation and saying ‘I just don’t know what to do anymore’.”

“It tends to be smaller, owner-managed type businesses,” she says. “You get the sense that they've been stuck for a long time and have now just run out of options.”

Many are already battling rising costs across the board – and now higher interest rates have pushed up the cost of borrowing as well.

“By definition, if you've got zombie companies that have just been hanging on at 0.25 per cent interest rates, then rolling those interest rates towards 2 per cent might be enough to start washing out those businesses,” Palmer adds.

“And the general economic backdrop as well means that lending criteria is pretty tight.

“It feels like we're moving towards a bit of a winter of discontent, where the number of insolvencies could start tipping up quite significantly.”

Alvarez & Marsal’s Fleming says the reckoning for zombie companies has been delayed until now by a post-pandemic burst of spending, following years of cancelled holidays and restrictions.

But consumer-facing businesses are about to “feel a chill wind”, he warns, as people return from their long-anticipated trips and start saving in preparation for soaring winter energy bills.

“When the only strategy is praying, you know the business is running out of options,” he says, adding that some of his clients are slashing their own salaries in order to stay afloat.

“Covid loans kept the lights on, but they still need to be repaid.”

Michael Fiddy, who co-heads law firm Mayer Brown's restructuring arm, agrees that next year is looking grim.

“The zombies have been remarkably resilient over the last 10 years,” he says. “However, that has been in a low interest rate environment.

“Inflation and rising interest rates will put increasing strain on their cashflows.”

Despite the gloomy picture, many economists say a bloodletting of zombie firms – handled the right way – may actually be a good thing in the long run.

Some have theorised that a rising number of zombified companies since the Great Recession is partly to blame for Britain’s pitiful productivity gains since 2008.

Patrick Minford, the Cardiff University economics professor favoured by Tory leadership frontrunner Liz Truss, recently argued that hiking interest rates would deliver a healthy dose of economic medicine by thinning the zombie herd.

“Zombie companies interfere with productivity,” he explains, “because the normal process of capitalism is for companies that don't make money to leave the market, while companies that can make money get funds and create products that are profitable.

“There's quite a lot of evidence that there are now a lot of zombie companies that should have gone but are hanging on because the cost of capital has gone so low.

“That’s a result of monetary policy – rates have been at pretty much zero for a decade – so it has been really easy for companies to survive on borrowed money, because they're not paying any interest.

“In my view, interest rates ought to get back to a normal level, so there’s a return to savers and a cost to borrow – a real cost.

“That, I think, will be a healthy discipline on the market.”

The drag on productivity from zombie firms, he argues, is even more pronounced when the labour market is so tight, because those firms are employing people whose time could be more usefully spent at better businesses.

Palmer, at Begbies Traynor, agrees that the demise of zombie companies is not necessarily a bad thing.

“They will have shown signs of distress for a long period of time but have just been able to sort of stumble on and keep themselves afloat,” she explains.

“You might say that's good, because if those businesses fall over there's livelihoods and jobs behind them.

“But what normally happens is the zombie businesses fail and the better-capitalised businesses pick up that market share, and are able to use that working capital much more efficiently and the jobs tend to get recirculated by those better-run businesses.”

The LSE’s Van Reenen warns there remain significant risks, however. Andrew Bailey, the Bank of England’s governor, and his fellow rate setters face a conundrum: hike rates too quickly and a steady trickle of zombie firm failures could quickly morph into an uncontrollable torrent.

Yet the need to quell rampant inflation may force the Bank’s hand.

“In the natural order of things, the zombie firms will go down and their assets will be reallocated to other firms,” Van Reenen adds.

“But you've got to be careful about when that happens, because if it all happens at the same time, instead of people leaving the zombies and working for the healthy, thriving companies, those people may end up just being unemployed.

“So that's a tricky call for policymakers; how you wind down the zombie part of the economy without throwing a lot of resources and people and assets out of business, which would be the worst of all worlds.

“You’d obviously like to have a slower transition rather than a hard landing. But it's hard to see how that's going to happen – because in order to keep inflation under control the Bank has got to raise interest rates.”

On the plus side, Britain’s low levels of unemployment and strong jobs market may help to cushion the blow as the zombie horde collapses.

But regardless, Fleming and his colleagues are expecting to do brisk business – certainly enough to warrant fielding a few calls from the beach.

“Business is escalating,” he says. “2023 and 2024 will be very busy years. We’re coming off a coma.”