Attack of the zombie companies

Zombie companies Australia COVID-19 jobkeeper ATO

Of all the risks that have been thrown up by the COVID-19 pandemic, a zombie apocalypse is probably not one of the first that comes to mind.

However, the prospect of many small businesses slowly but surely turning into zombie companies is a very real one – especially since the Treasurer, Josh Frydenberg, took action to reform the insolvency sector and allow companies to pursue US Chapter 11 style corporate bankruptcies, allowing directors to keep the company going rather than appointing administrators.

JobKeeper and other assistance measures promoting zombies

The list of zombie producing factors is now turning into quite a long one and includes:

  • JobKeeper is allowing small businesses to keep staff on even as debt builds up and work dries up.
  • Bank holidays on loans and leniency by landlords to struggling companies has created an artificial picture of business viability that will quickly evaporate in more normal times.
  • The Australian Tax Office has not been nearly as active as usual in issuing wind up applications.
  • Temporary rules first put in place in March and extended for six months in September relieve directors from personal liability for trading while insolvent.
  • The same rules make it harder to issue a statutory demand for unpaid bills, increasing the threshold from $2000 to $20,000 and giving debtors six months to respond to a statutory demand.
  • The number of companies entering administration has been falling very quickly, suggesting a backlog of struggling zombie businesses will emerge next year.

Even insolvency businesses are struggling

Interestingly, the insolvency industry itself has been hard hit by the seeming drought in company failures with JobKeeper now keeping many of them afloat.

However, many insolvency practitioners warn that as business begins to return to more normal times next year, there is likely to be a very long list of zombie companies ready to emerge from the shadows and go into administration.

Once creditors, banks and the ATO start to go searching for their money, they may find that the zombies simply can’t pay and quite possibly, debts are now larger than any assets remaining.

As part of this false dawn, the number of companies going broke this year has fallen dramatically and is currently running well behind the usual number of around 8000 companies that are liquidated.

That makes sense because the COVID-19 protections in place are shielding many businesses that would otherwise collapse once they encountered the harsh reality of failure.

Not all businesses will successfully emerge from hibernation

For some businesses being supported, the lifeline will keep them going and they will be able to emerge out the other side and trade their way out of any difficulties.

But with Deloitte Access economics warning that up to 240,000 companies could fail due to COVID-19, there will be many zombie companies that have been kept alive artificially and will not be able to cope with a return to normality – leaving many creditors owed money out of pocket.

One of the keys to that will be when the ATO begin to deliver statutory demands to businesses, something that will probably begin to happen next year.

The ATO is usually behind around 15% of all insolvencies but that percentage could increase given the unofficial pause due to COVID-19.

Add in renewed demands from banks and other financial institutions for mortgage payments to start up again, pleas for invoice debts to be paid and property owners wanting to collect their rent and you have a very successful recipe for a large number of zombie small businesses to simultaneously emerge from the shadows.

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