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Cable’s insolvency conundrum

Vince Cable says he is appalled at the evidence of a systematic pattern of unwarranted insolvencies said to have been triggered by RBS, as referred to in the Tomlinson report, which was prepared by his department’s “entrepreneur in residence”. But only 4 months ago he was warning that the UK economy is littered with zombie companies that would go bust when interest rates rise.

The economic impact of cash-starved companies that struggle to service their creditors is noted in another recent report, from the Adam Smith Institute. The Trading Dead identifies that “The UK’s “productivity problem” may be partially attributable to the existence of zombie firms preventing capital and labour from reallocating to more productive activities and restricting the entry of new firms into the market.”

Tomlinson may have identified a number of businesses going bust that should not have done (and I suggested a year ago that “the interests of banks’ shareholders are not always coincident with those of other stakeholders in a troubled business”), but there remain tens of thousands of zombie companies that need restructuring, some through an insolvency process. Any reaction to Tomlinson should avoid throwing the baby out with the bathwater.

As the Adam Smith Institute report concludes: “The right balance of liquidations and turnarounds can ensure that capital and labour is reallocated or refocused in such a way that it becomes productive and rewarding to investors, workers and the rest of society.”

 

 

Date: 26th November, 2013
Author: Chris Laughton

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