Zombie companies and suspension of the obligation to file for insolvency

The discussion about so-called "zombie companies" has gained considerable momentum in the last few days due to a sharp decline in insolvency reports. This is because the current development of insolvency reports does not reflect the economic impact of the Corona crisis. While the economy has slipped into a deep recession, the number of corporate insolvencies is falling, and with increasing momentum. In May, the number of insolvencies was almost 10% below the previous year's figure, and in July the decline was even more than 29% according to experimental data from the Federal Statistical Office. This development can be attributed solely to the suspension of the obligation to file for insolvency, which will remain in force for the time being until September 30.

The suspension of the obligation to file for insolvency is intended to protect companies that would have become insolvent due to the loss of income during the Corona crisis, although they are actually economically viable. This would be a helpful measure in principle. After all, many young as well as small and medium-sized companies are also affected by the crisis, who have not (yet) built up sufficient reserves for such a crisis, but who could successfully continue their business after the end of the crisis.

The suspension of the obligation to file for insolvency should actually be limited to this group of companies. However, this also keeps so-called zombie companies alive. Their number could even increase. In addition, politicians are now discussing extending the suspension of the obligation to file for bankruptcy until the end of the year or even until the end of March 2021. Such an extension is likely to exacerbate the problem considerably.

Originally, zombie companies were defined as companies that only survive due to the extremely low interest rates of recent years, but which would not be able to meet their interest and repayment obligations on a sustainable basis at "normal interest rate levels". Although their income from operations is too low, they do not leave the market. Similar to low interest rates, state corona aid such as special loans or the suspension of the obligation to file for insolvency have a similar effect.

Irrespective of the actual timing, there will be a wave of insolvency applications once this regulation expires. Indeed, the longer the suspension lasts, the greater the number of insolvencies is likely to rise afterwards. From March to July alone, despite the crisis, there were over 1,430 fewer insolvencies than in the previous year. That is still over 17%. This figure does not even take into account an increase that is highly probable due to the economic impact of the pandemic!

This represents a considerable risk for the German economy. Finally, the break-up of value chains due to the insolvency of suppliers or the loss of customer receivables could also affect the recovery of many other companies. Furthermore, zombie companies tie up scarce resources - such as skilled workers - in inefficient structures. These then lack companies with sustainable business models. This slows down not only their growth, but that of the entire economy.

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