Member Article

Zombie Companies the real drain on the economy

An insolvency specialist from leading law firm Higgs and Sons has suggested that ‘Zombie’ companies could be the reason why, three years on from the fall of the Northern Rock, there still appears to be no end to the economic downturn on the horizon.

As Government insolvency statistics for the third quarter of 2011 revealed both liquidations and administrations are rocketing (up by 9% and nearly 8% respectively), solicitor Oliver Ward-Jones believes these negative figures are masking the real problem, the “Zombie Company”, which is threatening to drag the UK’s weak growth back down into recession.

Oliver said: “Zombie companies are businesses making little or no profit. Rather than pull the plug on these businesses, the lending banks artificially prolong the life of these companies, that would otherwise would have failed, by varying the terms of their banking facilities.”

These companies limp on using capital and skills that would arguably be better placed in a growing business. At the same time, the company remains in a perpetual ‘closing down’ sale, dropping prices to attract customers, and potentially harming otherwise more profitable competitors.

It is clear that these zombies do not have a future; and by protecting these businesses, the banks are threatening to stunt long term growth. Weak businesses failing allows for a redeployment of resources from dead companies to ones which are on the rise. A rising economy builds confidence in the market, which ultimately leads to investment.

“Given the current trend, there is a real danger of Britain becoming a zombie economy, with the capital no longer being allocated in growing businesses and no new capital being invested,” Oliver warns.

The prolonged life of these companies clearly stifles market recovery, but what is the answer?

“It appears that we can take one of two options,” suggests Oliver, “either a shot in the head, or a shot in the arm.

“Ultimately, some of these companies are beyond resuscitation and, as a result, need to be wound up by a creditor. However some are viable businesses which need investment and potentially new management to move forward.”

However, the blame cannot only be placed with the banks for this current climate, as the management of these companies may be just as guilty.

“Directors often fail to take appropriate independent advice when they reach the point of default,” Oliver adds.

“Once a company has had to approach its lender to vary the terms of its facility, the directors need to take swift action at that time. All too often, once these alternative measures are in place, the directors fail to adapt their business to the current market whilst hoping that the upturn is just around the corner, and this can just make problems worse.”

It is clear, says Oliver, that whilst these companies continue to exist no upturn is forthcoming, and unless some decisive action is taken then a market recovery cannot, and will not take place.

This was posted in Bdaily's Members' News section by Hazel Crawford-Upton .