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Government keeping zombie companies on life support

Lachlan Maddock
— 1 minute read

Safe Harbor measures have kept zombie companies trading through the COVID-19 crisis, but Australia should be preparing for a “double whammy” of insolvencies in September.

Data from CreditorWatch shows that around 600 companies have stayed in business that would have collapsed in normal conditions – and that Australia needs to be prepared for a wave of insolvencies as Safe Harbor measures expire and companies lose patience with their debtors. 

“As lockdown restrictions impeded [cash flow], the measures announced by the government saved jobs and enabled firms that would otherwise have closed to hang on,” said Patrick Coghlan, CreditorWatch CEO. “This could be a stay of execution for struggling businesses and we should prepare for a [double whammy] of administrations when the measures are lifted in September.”

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Mr Coghlan also warned that the “picture is likely to get worse”, with data showing that defaults and court actions have rebounded after declines through March and April.

“Companies have held off registering defaults against customers or taking them to court for defaulting on payments due to the exceptional circumstances,” Mr Coghlan said. “The Safe Harbour moratorium and insolvency law changes have enabled businesses to survive without the [cash flow] to cover their outgoings.

“In the path to administration, we typically find that 50 percent of firms that default on a payment go into administration within 18 months. In this case, we’re expecting a lot of companies to skip these steps and head straight for wind up in September.”

Company directors should reach out to restructuring specialists now rather than “burying their heads in the sand”. 

“In just a few short months, the period for which directors are absolved of personal liability for trading insolvent will be lifted,” Mr Coghlan said. “Inevitably, decisions will need to be made as to whether or not a business is viable for continuation. The harsh reality is that many, many businesses will not be.”

Neu Capital co-founder Cyrus Church has also warned that government stimulus measures were keeping non-viable firms going through the crisis. 

“In the short-term, this is the right approach to take and the government, lenders and corporate sector have behaved admirably,” Mr Church wrote in an op-ed for Investor Daily. “However, as the economy begins to pull the government welfare band-aid off and we stagger out of our isolation, we will start to see how bad the wound is.”

 

Government keeping zombie companies on life support
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