Thousands of ‘zombie companies’ set to fail

About 5000 businesses are likely to fail over the next three months as the end of wage subsidies and debt moratoriums finally send so-called “zombie companies” over the edge.

Zombie companies set to fail​

About 5000 businesses are likely to fail over the next three months as the end of wage subsidies and debt moratoriums finally send so-called “zombie companies” 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.

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.

CreditorWatch chief executive Patrick Coghlan said an additional cohort of 2,000 businesses was set to fail this quarter, bringing the total number of companies that are likely to become insolvent to 5,000 in the second quarter of this year.

Mr Coghlan said the decline in 2020 insolvency figures seemed counterintuitive given the tough trading conditions as a result of the pandemic.

Cash is king

“But the temporary moratorium on insolvent trading the federal government introduced in 2020, as well as the JobKeeper provision, artificially supported some businesses that would have otherwise failed – so-called ‘zombie companies’,” said Mr Coghlan.

“I‘m not expecting the tsunami of insolvencies that was talked about last year, but the fact is, companies need to be allowed to fail; that’s how the economy works. It means companies that shouldn’t be operating aren’t pulling down the rest of the economy.”

Revive Financial partner Jarvis Archer said his firm was seeing an increase in unprofitable businesses with no realistic prospect of paying their debts, including tax liabilities commonly in the range of $150,000 to $300,000.

Mr Archer said there had been a worrying trend of businesses letting their financial accounts, and also their tax lodgements, fall behind.

“It seems that rather than the end of JobKeeper forcing business closures, it will be the eventual activity of the ATO, banks and other finance companies recommencing recovery efforts,“ said Brisbane-based Mr Archer.

He said despite the challenging environment, there was now a greater willingness to accommodate flexible payment terms in the business community. “It’s often preferable to get paid over time, and keep a customer, than to write-off the relationship,” he said.

He said the latest Brisbane lockdown would be difficult for businesses to handle, especially those in the hospitality and events sectors.

“Businesses at risk are already running on tight cashflow and a reduced buffer to overcome disruptions,” Mr Archer said. “While these businesses may be able to withstand a short closure, a key concern will be whether the current lockdown period is extended.”

Worrells solvency partner Nikhil Khatri said that the end of JobKeeper meant many businesses that had relied on the support measure would start to feel increased financial pressure. “There is likely to be deferred debts to landlords and the Australian Taxation Office, among others,” said Mr Khatri.

“It is critical that businesses in this position seek professional advice as early as possible from qualified and experienced insolvency practitioners. In many scenarios, better outcomes are reached where there has been early intervention.”

CBD cafes, restaurants and retailers have been among the hardest hit during COVID-19 as large number of office employees worked from home.

CreditorWatch, in conjunction with McGrathNicol, will on Wednesday launch a new whitepaper to examine insolvency trends, options for businesses working through debts and potential sources of funding.

“While insolvency numbers have risen in 2021, it’s the increase we needed to see,” said Mr Coghlan. “We need to get back to at least pre-COVID-19 administration levels and away from the synthetic environment we’ve lived in for the past 12 months.”

Originally published as Thousands of ‘zombie companies’ set to fail