Zombies
Are the
going to get us?
Company Liquidations in England & Wales fell nearly 16% year on year in the first three months of 2013 and were down 5.3% on the previous quarter according to the Insolvency Service. However growth in the economy remains low, bordering on non-existent, confidence has not returned and businesses still report a lack of bank funding available despite what the banks are saying. The above two paragraphs do not seem to make sense when read together, or do they? At the moment we have various factors which may hold the answer and be producing the zombie companies that we read about in the press. Traditionally companies have found themselves on the wrong end of a winding up petition if they fail to repay the bank or fail to keep up to date with their payments to HM Revenue and Customs. However we are in a period of historically low interest rates, HM Revenue and Customs have introduced their time to pay regime, the Banks do not want the adverse publicity of failing companies and the asset based lenders are conscious about adverse publicity over termination fees. The net result being the current “low rates of insolvency.” Other possible reasons for the current “low rates of insolvency” could be companies choosing dissolution rather than liquidation or is it the rise of the zombie company? A zombie company is one which although generating cash, is unable to make capital payments to reduce their debts. After covering running costs, fixed costs (wages, rates, and rent) they only have enough funds left to pay off the interest on their debts, but not the debt itself. They are near the point of insolvency but just able to survive. It has been estimated that there are as many as 150,000 of these types of companies and Venture Capitalists have argued that more of these should be allowed to fall into liquidation. Their case is that these companies have no assets and could cause the failure of other companies who continue to trade with them. Furthermore they point to the fact that the HM Revenue and Customs time to pay regime was designed to assist companies rather than prop up those that ought to be failing. Whilst their bank debts can be serviced all the time the interest rates remain low if these were to rise the effect would be that the zombie companies would be unable to service their debt and the knock on effect could be multiple failures and significant job losses. The other side of the argument is that if there really are 150,000 zombie companies if the average job loss for each were only 5 that would be an additional 750,000 unemployed. For the economy a potential loss of 750,000 consumers and 750,000 tax payers. There are also examples of companies which have been pulled back from the brink and make a strong recovery. If this is achieved the costs to the economy in terms of job losses, confidence and tax revenue are saved. The expertise that exists within the company is maintained and not lost. Thomas Cook is a case in point having gone from the brink of collapse to making a strong recovery, with the protection of 38,000 jobs. Perhaps the solution is that as far as zombie companies are concerned one size does not fit all. There has to be a balance to avoid talent and expertise being tied up in non-productive companies whilst at the same time allowing those which are not going to recover to fail. If the latter remain the concern is that the economy could enter a lengthy period of stagnation. By Darren Stone
is it the rise of the zombie company
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