The adverse implications of short-term company rescue and the proliferation of zombie companies post CIGA.

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) has expanded the availability of rescue procedures with the overarching objective of reviving financially distressed companies as a going concern. CIGA 2020 introduced both permanent and temporary measures aimed to maximise rescue prospects including restructuring plans, restrictions on contractual termination (ipso facto) clauses and the standalone moratorium. The aforementioned rescue procedures offer greater flexibility to companies in financial distress and represent a fundamental shift to procedures which promote debtor-in-possession characteristics as evidenced by the new restructuring moratorium.

While the availability of company rescue options is commendable, a careful balance must be struck to ensure that rescue proceedings are not pursued by non-viable companies as not all rescue measures are appropriate for struggling companies. Furthermore, there are economic justifications to allow non-viable or inefficient companies to fail and be replaced by new companies within the market. As will be discussed, there is a growing risk that company rescue procedures may lead to temporary and short-term survival which diminishes the overall economic value of the process. The pursuit of short-term rescue may result in undesirable outcomes such as the proliferation of so-called ‘zombie’ companies. The number of zombie companies appears to have risen since the enactment of CIGA 2020. Zombie companies are companies with accumulated debts and liabilities which far exceed the company’s assets. In such instances, the company is unlikely to be able to repay the sums owed on principal debts and can only generate enough working capital to pay off the accrued interest on the debt. As will be discussed, the economic implications of zombie companies are profound, notably, suppressing economic productivity, distorting competition and inhibiting investment. As many zombie companies are artificially prolonged with negative equity, this also impedes resources from being reallocated in more efficient ways, which directly harm the interests of creditors and other stakeholders. As such, this paper will examine the perceived notion of the undesirability of failure entrenched by the UK’s rescue culture and the implications of short-term company rescue. The paper will also examine the more recent company rescue measures, with a particular focus on the restructuring moratorium, to determine whether the appropriate balance between company rescue and allowing non-viable companies to fail, has been realised.