A comparative analysis of the legal framework for zombie companies in South Africa

Abstract

This study analyses the phenomenon of zombie companies in South Africa. Although there is limited scholarship available on zombie companies in South Africa, the phenomenon is not new. This study reviews the history of zombie companies, particularly how they increase after a large economic shock such as Covid-19. This is greatly due to the lax monetary policy implemented, and aid extended, during these times. South Africa’s policy responses to Covid-19 is unpacked and discussed. This is to illustrate the link between the actions of South Africa, and other actions which historically led to the increase in zombie companies in foreign jurisdictions. The study further provides criteria for zombie companies. Th criteria includes a definition, the characteristics and lifecycle of zombie companies. Thereafter, the study unpacks international best practices regarding the design of insolvency regimes. In this respect, Portugal is used as a case study. In terms of international best practice, Portugal’s regime was one of the most poorly designed. However, following reform to the insolvency regime, the number of zombie companies in the country continue to decline. Against this background, South Africa’s current insolvency framework and procedures are analysed. As an effective insolvency regime combats zombie companies through prompt restructuring and smooth exit, the study investigates whether South Africa’s insolvency regime aligns with international best practice and whether there are shortcomings that need to be addressed. The lessons learned from the reforms in Portugal are considered as possible solutions to enhance the South African insolvency framework to address zombie companies. After a critical analysis of the research findings, observations are made in order to provide recommendations for law reform.