Could hibernating businesses become “zombie firms”? Industry braces for spike in September insolvencies

Subcontractor Antony Reynolds is used to having trouble chasing up debts, but the COVID-19 pandemic is a whole new ball game.

The federal government has essentially pressed the pause button on debt collection in the wake of the outbreak, leaving the Adelaide-based owner of Fleurieu Plumbing and Gas with few options.

“It’s making it harder for contractors like us to get paid,” he tells SmartCompany.

“There are lots of companies not paying their bills.”

In March, the federal government unveiled a suite of temporary changes to insolvency laws to protect ailing firms from the axe, including extending the timeframe requiring debtors to respond to statutory demands from 21 days to six months.

Directors have also temporarily been absolved of personal liability for trading while insolvent, and the base debt thresholds for pursuing statutory demands has increased ten-fold under the changes.

The stop-gap measure, alongside the $130 billion JobKeeper program — now supporting more than 880,000 firms and 6.3 million workers — were foundational to the Morrison government’s coronavirus business “hibernation” strategy.

But those propped up by wage subsidies and other measures face an uncertain future come September when both protections and subsidies will expire.

CreditorWatch chief executive Patrick Coghlan says there’s a risk “zombie firms” will trigger a spike in insolvencies.

“If we don’t support them [distressed companies] further, we’re going to have an even bigger wave of insolvencies around September,” Coghlan tells SmartCompany.

Coghlan wants the federal government to fund an administration service to deal with winding up companies, and lift the insolvency safe harbour measures in stages, rather than all at once.

He says some companies in the labour-intensive retail and hospitality industries, which were already struggling with thin margins and slow sales in 2019, were likely considering voluntary administration before wage subsidies kicked in.

“In September, we’re seeing people’s money run out, government support comes to an end and the insolvency laws come to an end — it truly is a perfect storm,” Coghlan predicts.

Insolvencies among those in business dipped off in the three months to the end of March, according to Australian Financial Security Authority (AFSA) figures.

But in the lead up to the Morrison government announcing insolvency protections and the JobKeeper program, businesses were being encouraged to stay the course and go into “hibernation” instead of shutting down.

While the government has left the door open to varying the JobKeeper scheme following a June review, cutting businesses off runs the risk of dropping some off the edge of a financial cliff.

Corporate wind-up applications were already decreasing moving into April, down 26% between January and the end of March, according to the analysis of public documents published by Prushka Fast Debt Recovery.

Roger Mendelson, chief executive of Prushka, says he’s not anticipating an increase in wind-ups anytime soon, saying most corporations and the Australian Tax Office (ATO) have put the breaks on debt collection.

“There will be firms in September which won’t be able to pay their bills but may have been propped up by JobKeeper,” Mendelson tells SmartCompany.

“There will be a lot of technically insolvent companies … the question is whether creditors will take action to wind them up.”

Mendelson says only a small percentage of companies do get wound-up by creditors, primarily because there’s often no financial incentive.

The tax office is responsible for most wind-up activity, but has significantly decreased its debt collection activity in recent months.

Separate analysis published by corporate insolvency firm Worrels on Tuesday found the number of ATO wind-up applications has decreased to its lowest level since 2014, as the tax office adjusts its priorities during the pandemic.

In the three months between February and April, the ATO filed just 30 wind-up applications, down from an average of 120 over the same period since 2014 — a 75% decrease.

Coghlan says once debt collection activity starts ramping up again, a flood of insolvency action could drive a spike in illegal phoenix activity as the industry struggles to keep up with demand.

“Insolvency practitioners at the moment, I’ve spoken to plenty of them, and they’re struggling,” Coghlan says.

“They’ve stood down staff and made staff redundant, so they’re already under-resourced themselves.”

NOW READ: Subcontractors push for pay protections as COVID-19 bites sole trader cashflow

NOW READ: “I wait with anticipation”: Sole traders begin receiving JobKeeper payments as enrolment experiences vary wildly