The Organisation for Economic Co-operation and Development (OECD) has praised the UK’s streamlined insolvency system, saying that other countries should follow Britain’s lead in killing off living dead companies.
In a paper focused on productivity policy, the international organisation says that by allowing ‘zombie firms’ to fail relatively painlessly, Britain is able to free up resources that should go to more successful firms.
Britain is not often considered as a good model for boosting productivity. But in an OECD study of 39 countries, Britain was found the have the best designed business insolvency system.
The global think tank also praises the UK’s insolvency system for limiting the personal costs of entrepreneurial failure, which it says encourages innovation.
What are zombie firms?
The OECD defines a zombie firms as firms which are over ten years old and have “persistent problems meeting their interest payments”.
Since the mid-2000s, more of these zombie firms have emerged and more resources have been committed to the plateauing companies. This, the OECD claims, is particularly concerning because recessions and financial crises usually clear out many non-performing firms.
In Italy the share of industry capital stock sunk in zombie firms increased from 7% to 19% in recent years. In other countries it is as high as 29%.
Zombie firms are problematic because they drag productivity downwards and limit overall growth. They divert credit, investment and talent from innovative companies and slow down the take up of new technologies and best practices.
In other words, zombie firms eat healthy companies alive.
The UK’s insolvency example
The UK’s insolvency process is streamlined and painless compared with other countries. The OECD believes that other major economies could revive productivity growth by adopting similar insolvency policies.
The idea goes that the easier it is for companies to become insolvent, the more quickly capital can be reallocated to more efficient purposes.
There are 13 key features that impact insolvency regimes, including the personal costs to failed entrepreneurs and the rights of creditors.
If Italy adopted the UK’s approach and allowed firms to restructure more easily, the OECD claims it would make capital 4% more effective.
By allowing individuals to start new business ventures within a year, the UK system avoids stigmatising entrepreneurial failure. In Estonia and Hungary the limit is five years.
But all is not sunny in Britain. Living dead companies walk among us here as well.
The OECD claims that there are as many as 100,000 zombie companies in the UK and suggests that the country would benefit if it encouraged something of a clear out.
Options for business insolvency
Businesses that are struggling to repay debts have a number of viable options available to them.
Our specialist commercial debt team will be able to talk you through all the options and help you make the right decision for your business and personal future.
Get in touch with the team today. Call: 0800 611 8888.