OECD: UK insolvency practices should be mirrored in Europe
Streamlined UK insolvency practices enhance productivity and ensure that innovative companies succeed, a global think tank has claimed.
The Organisation for Economic Co-Operation and Development (OECD) said that the UK enables creative destruction, the process whereby so-called zombie firms are allowed to fail, which benefits the wider economy.
The think tank said resources end up at more productive companies as a result and suggested that other countries should follow the UK's regulatory set-up.
By definition, zombie businesses are those which need regular bailouts on order to operate or are indebted firms which are only ever able to repay the interest on any sums owed.
As zombie firms can tie up capital, allowing these companies to fail can provide finance for those more likely to succeed.
The report highlights that there are a number of European nations where a growing proportion of resources are tied up in poorly performing businesses, citing Italy as a leading example.
The OECD deems restructuring businesses in the UK to be easier than in other European countries, while there are also fewer limits on starting new entrepreneurial ventures.
Whereas unsuccessful entrepreneurs can start a new venture immediately after a failure in the UK, they must wait five years in Hungary and Estonia for example.
This avoids stigmatising failure and helps to create an economic environment where individuals and businesses are more prepared to try things out.
The administration process in the UK enables businesses to be rescued as a going concern, or to achieve better results than would otherwise be possible were the company to be wound up.
In most circumstances, a business can return to solvency via a company voluntary arrangement or is sold, alongside its assets, as a going concern.
The OECD report adds that while killing off zombie firms results in the loss of jobs and the churn of companies, effective retraining is making it easier for employees to find more work.
It is claimed this goes somewhat to mitigating the loss of the firms while also ensuring that any job growth is driven by meaningful employment.
By Phil Smith