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Rise of the Zombies

Date: 19/06/2020 | COVID-19, Corporate

During this pandemic the government has provided unprecedented levels of support for businesses by way of grants, loans and furlough payments. Whilst it has been pulling out all the stops to ensure business survival, there are concerns it is also setting up the economy for serious long term pain.

Businesses are racking up debts on a massive scale – unpaid rent, unpaid VAT, unpaid taxes, bank loans and government loans. Short term profits for many will be non-existent and business operations may well be unviable for some time to come, but the government is encouraging businesses to hang in there and take on as much debt as they can get.

However, as expectations of a V-shaped economic recovery start to recede, people are facing the reality that the economy may recover much more slowly than was hoped and there is now increasing concern about this debt mountain.

The future wave of insolvencies when these debts have to be repaid will make every other recession look timid by comparison, but even more worryingly the government may well have created a whole swathe of stagnant companies in industries seriously affected by the pandemic. The existence of huge numbers of zombie companies, businesses that are not profitable, which just earn enough to cover interest payments and are kept alive by support from their funders, could have profound and painful consequences for everyone from employees to shareholders for many years to come.

These zombie businesses have no spare cash or capacity to invest or grow, they can’t employ more staff or develop their business and are always one step away from insolvency. On the flip side as long as they are not actually losing money on an operational basis they do not need to make further redundancies and can service their debt even if they can’t repay it.

So why are zombie businesses a bad thing? In essence they suck up economic resources that could be better employed elsewhere. If companies are being kept alive that would otherwise have gone out of business, that impacts on the potential for growth of the economy and on productivity, slowing the pace of economic recovery and impacting on us all.

Given the scope of the economic collapse and the potential for mass unemployment, most experts say the government had to throw all they could at the problem but such dramatic interventions can cause problems as well as solve them. The rise of the zombies is the corporate challenge that lies ahead.

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

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