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A blowout in payment times and a drastic fall in business voluntary administrations point towards an “astonishing collapse” once the government’s temporary insolvency relief measures come to an end.
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‘Astonishing collapse’ on the horizon as zombie companies spike
10 September 2020
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9 minute read
CreditorWatch’s latest research has shown late payment periods between businesses have lengthened to 43 days, meaning businesses are now taking 2.9 times longer to get paid.
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Despite a lack of cash flow, business administrations have fallen by 59 per cent compared with the average in 2019.
According to CreditorWatch chief executive Patrick Coghlan, this is leading to a rise in zombie firms that will not survive once the government’s extension of temporary insolvency relief measures expires at the end of the year.
The temporary measures extended to 31 December include increasing the threshold at which creditors can issue a statutory demand and initiate bankruptcy proceedings, and provide relief for directors from any personal liability for trading while insolvent.
“By extending the moratorium to December, the government is wasting taxpayer money by kicking the can down the road,” Mr Coghlan said.
“It means that solvent businesses are having to trade with otherwise insolvent debtors, risking their own health, while doomed businesses are able to put off paying creditors or even the ATO.”
According to the research, finance and insurance companies are the least likely to be paid on time, with a 657 per cent spike in late payments from this time last year.
Transport, postal and warehouse late payments were up by 500 per cent to 90 days, while administrative and support services late payments increased by 543 per cent to 90 days.
Mr Coghlan believes the government needs to ease safe harbour measures to prevent a tsunami of insolvencies in January 2021.
“While safe harbour legislation was critical in stabilising the Australian economy as it went into recession, the measures are now becoming counterproductive because they are propping up companies that should be allowed to fail,” Mr Coghlan explained.
“That’s why this legislation needs to be eased off gradually running up to the December deadline. Otherwise, we could see an astonishing collapse come January.”
CreditorWatch’s chief economist, Harley Dale, pointed out that many businesses are currently thriving and the ones that are not should be allowed to fail.
“CreditorWatch’s monthly Small Business Risk Review paints a stark picture of Australia’s economic landscape. With payment times staying stubbornly high, it’s clear that the SME sector is struggling to generate cash flow outside of government support, indicating that there is a mountain of trouble behind the curtain of stability,” Mr Dale said.
“It sounds harsh, but these businesses need to be allowed to fail so that government focus can be aimed at companies that can stand on their own two feet.
“Winding back safe harbour measures, while ensuring borderline companies receive the assistance required from restructuring bodies, is crucial to ensuring Australia passes through the next ‘economic gate’ without taking a massive blow at the beginning of 2021.”
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