A group of credit sector leaders are urging the Government not to extend insolvency protections into 2021, stating it is propping “zombie businesses” up and putting creditors at a significant disadvantage.
According to CreditorWatch CEO Patrick Coghlan, eventually the sector will need to stop protecting these businesses and, when there’s nowhere to run for unviable or fraudulently run businesses to hide, there’s a danger good businesses will be dragged down with them.
“The challenges will come once we actually stop kicking the can down the road,” Coghlan said.
“You’ve got those who are probably not engaging [with creditors] because they can’t make payments, but then you have those who probably could make payments but are taking advantage of the legislation, the changes, and the climate to hoard their cash and not make payments to anyone.”
Australian Restructuring Insolvency and Turnaround Association boss John Winter agreed that the measures are allowing unviable businesses to continue despite needing to go through a solvency process.
“There is a clear policy intent that the Government wants insolvent businesses to keep trading. That means they are racking up debt with an inability to pay it,” Winter said.
“The consequences really are simple: it means creditors won’t get paid.”
Winter said a more simple solution would be to take a leaf from what the Government did after the bushfire crisis in early 2020, and offer businesses a voucher to get business advice on how to improve the business – rather than simply propping up one that is failing.
It isn’t likely the business community will see a sudden spike in insolvencies, according to Winter, but an extended period of businesses winding down as they come to the realisation the market isn’t there in the way it used to be.
And, once the JobKeeper stimulus measures wind up, unviable businesses won’t be able to pay their staff and bills.