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As Australia braces for an insolvency increase, viable businesses should take the opportunity to focus on remaining solvent, as “zombie” businesses are wound up following the expiry of federal support measures, according to one insolvency firm.
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Viable businesses should ‘focus’ as Australia braces for insolvency bump
26 May 2021
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10 minute read
Data released by trade credit insurer Euler Hermes shows a forecast insolvency increase of 10 per cent through 2021 in Australia, and 10 per cent higher in 2022, compared with 2020, which recorded a 41 per cent year-on-year decrease, and 2019, which rose by just 1 per cent.
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Brad Morelli, national managing partner at Jirsch Sutherland, a national insolvency firm, said that even though Australia has fared better than other markets, the weaknesses of a sizeable cohort of businesses have been exposed by the withdrawal of targeted federal support.
“In Australia, government support has cushioned the fall and put the country in a strong position compared with many other regions,” Mr Morelli said. “But it doesn’t mean there won’t be companies winding up.
“The phasing out of the stimulus measures is expected to start an increase in insolvencies from the second half of this year.
“And the zombies will be leading the charge — particularly pre-COVID zombies, companies that weren’t viable before the crisis but were kept afloat by the emergency measures; and COVID-19 zombies, companies weakened by the pandemic, notably in the sectors most impacted by the pandemic, such as restaurants, hotels, tourism and travel.”
Australian businesses, however, have largely avoided expectations of a surge in global insolvencies.
Global insolvencies are forecast to rise by 25 per cent in 2021, compared with 2019. In 2022, the rate is expected to jump by another 13 per cent.
North America is expected to be among the worst affected, with 2021 insolvencies forecast to jump by 22 per cent by the end of 2022, compared with 2019. Meanwhile, Latin America is expected to see an increase of 31 per cent.
Western Europe, too, is expected to see a bump of 23 per cent over the same period, while Asia is expected to record an increase of 18 per cent more.
Mr Morelli said that this year’s insolvency bump might not be limited to unviable businesses. He said that business leaders should take the opportunity to reassess the ways COVID-19 has impacted their cash flow and profitability, and look to support.
“There are also still-viable companies that have been scarred by the 2020 hit on cash flow and profitability,” Mr Morelli said. “The scars will take time to heal, but with the right help and solutions, they can turn their businesses around and prepare for the future.”
In March, Mr Morelli predicted that the end of JobKeeper would prompt a wave of insolvencies around Australia, as the ATO was tipped to pivot to a post-pandemic compliance crackdown.
“While the ATO has been very quiet for almost 12 months, that won’t last,” he said. “And that’s when we expect to see the insolvency wave building.”
The ATO’s debt book grew to $53 billion over the last year, and Mr Morelli warned businesses that the Tax Office would move to pursue outstanding debts once businesses receive their last JobKeeper payments in April.
“It’s crucial for business owners and directors to be proactive and to act early if they’re in financial distress,” he said. “There’s a huge difference between early intervention, a controlled process, a reactive process and a forced winding up.”
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