Larger companies become insolvent, smaller ones cease to exist

The high number of company closures is partially due to the openness of the Czech economy.
In 2009, 86 per cent out of 1480 companies that went bankrupt in the Czech Republic were businesses of more than one person – while the rest were sole traders. However, many more companies, in particular small ones, simply ceased operations. Not all companies went bankrupt.

ONE POSSIBILITY

Last year, the number of companies registered in the Business Register decreased by more than 98 thousand. However, the ratio of the dissolution of companies with more than one person to sole traders was the opposite of bankruptcy. Approximately 90% of dissolved companies were sole traders, while the remaining 10% represented companies of more than one person. The Business Register lists four ways of dissolving companies and seven ways of dissolving sole traders. Bankruptcy is just one of them.
What lies behind the high number of dissolved companies? In part, the openness of the Czech economy, which depends heavily on the economic development of its main foreign trading partners. The Czech economy could therefore not avoid the impact of the global financial crisis. Contraction in demand, reduced offer of bank loans, growing unemployment and slow wage development have been reflected in a decreased volume of business contracts and impediment of the sale of goods and services. Some companies were unable adapt to the changing economic circumstances or failed to have an appropriate reserve to overcome difficulties, and therefore ceased business. Analysis of dissolved businesses shows what kind of companies went out of business and the most common ways in which they were dissolved.


DISSOLUTION

We can look at the dissolution of companies in a number of ways. One of them is the number of employees. A significantly larger number of dissolved sole traders shows that small and very small companies in particular are being dissolved. A total of 81% of all the dissolved businesses stated under the number of employees that they were companies without personnel. The results were similar in regard to the structure of dissolved companies according to turnover. Companies which did not achieve any turnover represented 77% of all dissolved businesses last year. Adding companies with an annual turnover up to CZK 200,000, the percentage grows to 87%.
Also the place where a company is situated and the field of business activity influence whether a company will cease to operate or not. The majority of more than five thousand dissolved businesses were located in the Prague Region or the Jihomoravský Region. However, those regions also have the highest number of registered companies. The number of dissolved companies is lowest in the Vysočina Region and the Karlovarský Region. The highest number of dissolved companies (22%) were in the wholesale trade, excluding motor vehicles. Retail trade, excluding motor vehicles, occupied second place. The companies of that sector accounted for 15% of all dissolved companies – this number was twice as high as the number of newly established ones. More than 14% of all dissolved companies were involved in activities in the property sector.

CONCLUSION OF ACTIVITIES

In what way were the companies dissolved?
In the case of sole traders, dissolutions occurred in a variety of ways. The most frequent was the notification of the conclusion of activities. That represented 84% of all sole traders dissolved last year. Another 10% were dissolved due to failure to re-register, since this can also mean the voluntary conclusion of activities.
For companies of more than one person, the most frequent way of dissolution in 2009 was liquidation of the company. This represented 60% of the total number of company closures. In this case, the company assets are distributed among creditors should they file a claim, and the rest among the owners. This means that in two thirds of the dissolutions of companies, the business assets were not transferred to any legal successor. Those cases therefore involved de facto dissolution of the companies.

OTHER WAYS

The second most frequent case was dissolution of companies without liquidation and without legal successors, accounting for 27% of the total. The main reason why liquidation did not take place was a lack of assets in the company being dissolved. This also included cases in which the court dismissed a petition for bankruptcy due to a lack of assets, or after completion of the bankruptcy proceedings no assets were left in the company concerned. The consequence was therefore similar to the preceding case. The company underwent de facto dissolution, but the creditors' claims were only negligibly satisfied.
In 2009, dissolution of a company in one of the remaining two ways –liquidation with one legal successor (merger) or with several successors (demerger) –took place in 13% of cases. Such forms of dissolution mean that companies continue to carry out economic activities, but under a new business name. Reliability of such data is however reduced by the fact that in 2009 more than half of the dissolved companies did not state any method of dissolution. For sole traders, this occurred in 40 per cent of all cases.

SLOWER GROWTH

It follows that only a small proportion of all dissolved companies were closed due to bankruptcy. However, the ratio of companies of more than one person and sole traders going bankrupt was almost completely inverted in the case of dissolutions. The good news, however, is that the total number of companies is growing all the time.
This year, a similar trend is also expected, but may be a little slower. Lingering economic recession will result in an increase in the number of dissolved companies. The expected gradual recovery of the Czech economy can on the other hand contribute to the creation of new companies.

CONTEXT

Last year, the number of companies registered in the Business Register decreased by more than 98 thousand. Approximately 90% of dissolved companies were sole traders and the remaining 10% represented companies with more than one person. 
The Business Register lists four ways of dissolution for companies and seven ways of dissolution for sole traders. Bankruptcy is just one of them.

About the author| VĚRA KAMENÍČKOVÁ, Head of the Analysis Division of the Czech Cred