Where’s an economist when you need one?

R3 in the UK has commented on a recent OECD Report, about which we gave some views when it came out, in July 2017.

As R3 says, the OECD report has concluded that the UK’s insolvency and restructuring framework is the most effective at “preventing a build-up of productivity-sapping zombie companies”, those

“struggling companies aged 10 years or older who cannot cover debt interest payments with their profits for three consecutive years – redirect investment away from innovative rivals, push up wages, and undermine productivity, and that an economy’s insolvency framework is a key factor in reducing zombie firm numbers and investment”.

The OECD report uses 13 key criteria to rank insolvency frameworks in 34 OECD economies according to their effectiveness at closing down zombie companies (and helping their capital and resources be re-used more effectively elsewhere), restructuring zombie companies back to financial health, or preventing zombie companies from developing in the first place.

Using these criteria, the UK’s insolvency and restructuring framework is by far the most effective at dealing with zombie companies, followed by the frameworks in Japan and Germany.

Comment

Australia not have this level of economic focus on our insolvency regime. There is no co-ordinated economic, let alone legal, focus on what we have, what it does and what it needs. Zombie companies, however defined, are too refined an issue for us.

Some recent reforms and aspects of our regime in Australia are in fact counter-productive to weeding out zombie companies, including that:

  • we have no government liquidator (though this is now being raised),
  • no streamlined process for liquidating and disposing of a zombie company (the government has side-stepped streamlining reform),
  • a lack of information from ASIC (“the risk that insufficient oversight of the deregistration process may be facilitating harmful phoenix activity was identified more than 20 years ago …”),
  • a lack of transparency in the corporate process (we need “information about companies available to the public free-of-charge and … a searchable register of disqualified and ‘restricted’ directors”, who are of course properly identified);
  • the denial of corporate insolvency jurisdiction to the Federal Circuit Court, which, potentially, could be the SME insolvency court, in that space being found much of the unlawful phoenix and zombie activity; and
  • more; see Professors Helen Anderson’s and Michelle Welsh’s phoenix reports.

Getting back to the point of the OECD Report, the issue of zombie companies and related problems – phoenixing for one – needs more analysis and input from the economists.

Can we in Australia confirm what the OECD says about zombie companies? What is the extent of underused capital, the cost of reallocation, the impediments to efficiency? How do we rate with comparable  economies? Economists can then guide the policy makers, lawyers and accountants as to where the problems lie.

But the economists sadly don’t offer much in this field, compounding Australia’s lack of a co-ordinated legal approach with economic ignorance. 

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