These "zombie" companies limp on using capital and skills that would arguably be better placed in a growing business.
An insolvency specialist from 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 fourth 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.
Ward-Jones 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."
What should be done?
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 appears that we can take one of two options, either a shot in the head, or a shot in the arm," Ward-Jones says.
"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."
Lack of independent advice
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," Ward-Jones 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, 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," Ward-Jones concludes.
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