Insolvency and bankruptcy protections extended despite zombie firm fears

In September we saw increasing concerns around “zombie firms” that have been shielded from failure by COVID-19 measures including JobKeeper Payments as well as temporary insolvency and bankruptcy protections.

Protections extended to 31 December

Initially due to come to an end this month, those protections have been extended to 31 December. This will help many businesses continue to trade into the Christmas period despite adverse market conditions they may be facing.

Separately, we recently published an article from our own Keri Liang about the extension of JobKeeper beyond 27 September.

The extension of the insolvency and bankruptcy protections came in the wake of news from the ABS that Australia’s economy had shrunk by 7% in the June quarter, the greatest contraction since the Great Depression. A 6.3% contraction over the last 12 months has placed us in our first recession since 1990-91.

The rules and results

Under the current (temporary) rules, business owners do not face personal liability for insolvent trading (for debts incurred in the ordinary course of business).

Additionally, the threshold for creditors issuing statutory demands has increased from $2,000 to $20,000 and companies now have 6 months to respond instead of 21 days.

These measures were intended to buy time for businesses struggling to adapt and survive facing the economic impacts of the pandemic in their industries.

Statistics have shown the effects of these policies, with ASIC reporting the number of companies entering external administration in July was down 56% versus the same time last year. On the flipside, solvent businesses may be suffering (as creditors), with CreditorWatch reporting that credit inquiries are on the rise and businesses are generally waiting nearly three times as long as last year to be paid.

The concerns

Although it seems an unsympathetic position to hold, many professionals and experts warn that current protections are simply delaying the inevitable.

Chief executive of CreditorWatch, Patrick Coghlan, said, “Whilst Safe Harbour legislation was critical in stabilising the Australian economy as it went into recession, the measures are now becoming counterproductive because they are propping up companies that should be allowed to fail…”

Given insolvencies are so far below 2019’s comparatively “normal” levels, there are concerns that when the extended protections end on 31 December, we could see a large number of employing businesses fail early in the new year.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell was quoted in this article saying, “Deloitte Access Economics modelling estimates about 240,000 small businesses are at risk of failure, highlighting the critical need for small businesses to sit down with their trusted financial adviser for a viability assessment.”

Final note

Government protections can’t go on forever and responsible financial management, including cash flow forecasting, is more important than ever. Although the future is still highly uncertain for small businesses in Australia today, it is so important to plan ahead with any available data and the help of professional advisors.

For any of our clients or followers who may have concerns around their own potential to be a “zombie” business, please contact us for a discussion around what we can do to assist you through this challenging time – don’t go it alone!