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Rise of the zombie businesses as policy delays the inevitable

A Federal Government initiative to save thousands of businesses from sinking into insolvency during the pandemic was full of good intentions.

Sep 09, 2020, updated Sep 09, 2020
Christian Porter  (Photo: ABC)

Christian Porter (Photo: ABC)

But a new analysis suggests all it’s doing is creating a new breed of “zombie” companies and paving the way for a tsunami of insolvencies when the support measures end at the end of the year.

This week Treasurer Josh Frydenberg and Industrial Relations Minister Christian Porter decided to keep the insolvency and bankruptcy protections in place until December 31.

They are also extending relief for company directors from any personal liability if they oversee firms trading while insolvent.

“These changes will help to prevent a further wave of failures before businesses have had the opportunity to recover,” the pair said in a statement.

“As the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.”

However, a study by digital credit agency CreditorWatch indicates that all it is doing, in a number of cases, is putting off the inevitable.

It found business administrations fell 37 per cent from July to August and are 59 per cent lower than the average across 2019, meaning that thousands of businesses are now relying on government support to stay afloat.

CreditorWatch CEO Patrick Coghlan said while the legislation was critical in stabilising the Australian economy as it went into recession, the measures are now becoming counterproductive.

“They are propping up companies that should be allowed to fail,” Coghlan said on Wednesday.

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“By extending the moratorium to December, the government is wasting taxpayer money by kicking the can down the road.”

He said solvent businesses are having to trade with otherwise insolvent debtors, risking their own business health, whilst doomed businesses are able to put off paying creditors or even the Australian Taxation Office.

Coronavirus-hit Victoria saw a 49 per cent drop in the number of businesses filing for bankruptcy in August, while NSW saw a 34 per cent fall, following a more modest decline of around nine per cent in July.

CreditorWatch found Queensland was the most impacted by the government measures, posting a 25 per cent decrease in insolvencies in August on top of a 39 per cent drop in July.

-AAP

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