‘Zombie’ firms kept alive to grab government cash

Scores of ‘zombie companies’ have been kept alive in order to receive final government stimulus measures before being shut down, according to a leading insolvency expert.

Scores of ‘zombie companies’ have been kept alive in order to receive final government stimulus measures before being shut down, according to a leading insolvency expert.

Revive Financial partner Jarvis Archer said the “clean up” of zombie companies was under way with an increase in liquidation appointments across a range of industries. A ‘zombie company’ is defined as a failing firm that needs a bailout to successfully operate.

“While the end of JobKeeper has not brought the predicted tsunami of insolvency appointments, the numbers are bigger,” said Mr Archer.

“Many companies we’re seeing have been dormant for months, often since the first COVID lockdowns in early 2020, but have been kept open to obtain the final government stimulus payments before being shut down.”

About 5000 businesses are likely to fail over the next few months as the end of wage subsidies and debt moratoriums finally send them over the edge.

A raft of COVID-19 support measures introduced during the height of the pandemic last year has propped up many firms that would have normally failed.

Rise of the zombie firms.

In an average year about 8000 businesses are placed into external administration according to Australian Securities & Investments Commission data, but last year this dropped to 5000, meaning 3000 companies that should have become insolvent are due to fail this year as props such as JobKeeper come to an end.

Mr Archer said that combined with reports of increased debt collection activity by banks and power companies, the number of insolvency appointments would grow in coming months. He said corporate failures were across all sectors including hospitality, mining and training.

“Often companies have been left with no assets and can’t even afford the costs of liquidation,” he said. “Generally, it is the Australian Taxation Office (ATO), banks and other lenders who are owed the most by financially struggling companies.”

He said the trigger point for many businesses would not be the end of JobKeeper and other assistance, but the move by the ATO to collect overdue tax debt. “The ATO is still being fairly restrained at the moment” Mr Archer said.

He said that directors hoping to minimise the impact of a business insolvency on their personal finances should not delay making an insolvency appointment to their company. A delay could mean greater personal financial risk.

“Directors can be held liable for debts incurred while their company is insolvent and the ATO can make them personally liable for their company’s BAS (Business Activity Statements) and superannuation debts,” he said.

A director looking to keep their company alive has options including the Federal Government’s new small business restructuring process. However, only a handful of companies have taken up this opportunity.

“A restructuring process can help an insolvent company reduce tax and other debts to an affordable level, allowing its business to recover from COVID and trade viably into the future,” Mr Archer said.