Are Protections Keeping Zombie Businesses Artificially Afloat?

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Due to financial distress, many businesses have been experiencing, the Government made the decision back in March to relax the rules regarding bankruptcy and insolvency. These relief measures essentially made it much harder for creditors to pursue outstanding business debts, leaving creditors unable to issue bankruptcy notices to any businesses owing debts under $20,000.

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Under normal circumstances, each company director has a strict duty to cease trading immediately if they’re insolvency is looking likely, with them facing financial liabilities as well as legal problems if they continue to seek finance. The government introduced time-limited emergency coronavirus legislation that suspends the threat of liability for wrongful trading. The notice period for creditors to act on outstanding debts has also been extended, which actually allows many companies to continue trading without paying loans, taxes, and even rent.

Take Melbourne for instance, these changes were originally set to finish at the end of September, but with further lockdowns in place, many commentators have been predicting that these changes would have to be extended in order to give businesses the chance to trade themselves out of insolvency. In fact, the need for this support for businesses has only intensified as we begin the next stage of recovery.

Zombie Businesses: The new norm

Firms that are attempting to adjust to this new normal will be faced with steep costs alongside limited revenues. Without these insolvency protections in place, we will most likely see some entirely preventable company collapses, putting both our economic recovery and many thousands of jobs at risk. Company directors are doing whatever they can to ensure they survive the crisis, and certainly should not be penalized for acting responsibly amid these unprecedented circumstances.

Many have argued that these emergency measures should be extended to aid the economic recovery from the pandemic and to safeguard jobs. That’s why the Federal Government has ultimately decided that these temporary rules regarding bankruptcy and insolvency protection due to COVID-19 would be extended until the end of this year.

Delivering a lifeline to zombie businesses, but will it last?

While all of this will certainly provide many businesses with a lifeline to help them recover from the impact of this pandemic, there are some businesses that will still, unfortunately, end up in voluntary administration when the new year rolls around. Commentators have already warned that these protections have caused a sharp decline in insolvency proceedings over the past few months, with insolvencies down over 60% compared to the same time last year.

The current decline in the number of voluntary administrations is already creating a backlog, and any rise in corporate insolvencies will also see an increase in unemployment across the board, as well as a decline in business and consumer confidence. This also means that there will no doubt be a number of zombie businesses that are already being kept artificially afloat due to these protections, so this extension will most likely only add to that number.

Creditor advocates have also warned that extending these insolvency measures would also damage their industry. That being said, it still remains to be seen whether this will simply defer the anticipated insolvency spike resulting in a tsunami of future liquidations in the new year, or if it will afford these struggling businesses the time they need to trade themselves out of insolvency.

Coronavirus and beyond

In any case, most businesses will relish this extension, as it provides them additional time for them to do what they can to get their trading closer to what it would be normally. But business owners should definitely not allow themselves to become complacent in any way. Because, while these temporary changes provide some much-needed relief, they must be laser-focused on repaying debts before 2021 if they hope to avoid dealing with impending insolvency proceedings.

While recovery from the COVID-19 pandemic has already started, we are certainly not out of the woods yet. Some businesses around the country are beginning to emerge from the coronavirus, but there are many small firms that are normally successful in perilous positions.