Zombie Companies Seem To Be Taking Over

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It is expected that, after the economic crisis within Australia, there will be an iflux of zombie businesses.

Fears are being raised as insolvency firms are relying on JobKeeper to stay afloat – there are concerns that there may not be enough practitioners left to combat the issue once unpaid debts begin being chased by the Australian Taxation Office and other creditors.

To save the collapse of thousands of businesses, our government is relying on insolvency laws.

Josh Frydenberh, our Treasurer, has announced potential improvements to the insolvency sector. The US Chapter 11 style of corporate bankruptcy will be opened for small businesses.

This would provide small businesses selling renovation services with cap fees. Further, they would hand over the business to directors instead of their administrators.

These rules were put in place in March but were extended a further six months in September. These rules included the relief for directors personal liability if they trade while bankrupt.

It will also, for the time being, be more difficult to demand statutory for unpaid bulls, with the threshold being raised to $20,000 and the response to demands raised to six months.

The protections for these non-viable businesses were extended to the end of 2020. However, the head of the credit managers’ peak body believes that, while small businesses are praising it, this extension is a bad idea that will only prolong the economic shock.

“These necessary measures give otherwise viable businesses more time to recover, preventing a wave of unnecessary insolvencies.”

Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, states that “while we support this temporary relief for financially distressed businesses, there will also be a number of zombie businesses kept artificially afloat as a consequence.”

The ATO will see approximately 8000 companies a year go through liquidation, with approximately 15 per cent of insolvencies being instigated by them.

In September, Frydenberg announced that the extension to this relief would “help to prevent a further wave of failures before businesses have had the opportunity to recover.”

However, there are significant concerns that, despite protections, businesses could continue wracking up debt. Deloitte Access has predicted that next year, 240,000 companies could fail due to the struggles Australia is currently facing. If this is true, that would be a 3000 per cent increase from previous years.

Nick Pilavidis. the Chief executive of the Australian Insitute of Credit Management, believes that the protection should not have been extended. He states that his 2600 members had the ability to distinguish a zombie business and a viable business that is still struggling.

He says that “definitely the extension, we feel, was unnecessary and has a bigger potential downside.”

He continues, “One of the issues is that any payments that our members recover [now], could be later clawed back through the insolvency process.”

“While [insolvency] numbers are down, the risks are not down.”

Pilavidis emphasises that the more debt businesses build, the more likely it is that they can lose their assets as collateral.

John Winter, chief executive of the Australian Restructuring Insolvency and turnaround Association, has expressed concerns that next years stockpile will not be easy to handle. Many insolvency firms are using JobKeeper to stay afloat, therefore, if insolvency goes on for too long, the debts established could become greater than the assets.

“By the time an insolvency practitioner is appointed to close that business down, there is less than nothing less. there is no chance to recover anything for creditors, there’s certainly no chance to save the business and the liquidator is unlikely to even get paid themselves,” states Winter.

“If a bad business is being propped up and they are not paying good businesses, what they do is place that good business at risk itself.

“If you want to come out of this recession, you want good businesses protected, not the bad ones.’’

Brent Morgan, director of Rogers Reidy, states that there have not been any ATO applications to close any businesses since March this year.

There is a concern that the ATO is now holding thousands of statutory demands that could be released all at once next year.

“They might all happen at the same time, which is probably going to be early next year,” states Morgan.