When COVID first hit, businesses Australia-wide, understandably, freaked out. Will people stop buying? Will revenue dwindle? Will I have to lay off staff? Will I be able to pay my bills?
To ease the strain, the government stepped up with a package of stimulus measures to keep businesses afloat. These measures, which included JobKeeper, saw many through the tough times. But what’s the situation since these ended at the end of March?
The presumption was that we would see Australian businesses collapsing by the thousands post-COVID as zombie businesses emerged and flailed, but has this happened, or is it still to come?
Zombie businesses and rising insolvency
In mid-March, some experts predicted that many businesses would become zombie businesses and at least 5,000 Australian businesses would go broke once the jobkeeper wage subsidy ended, the ATO began collecting, and insolvency rules went back to their pre-COVID settings.
A zombie business is a business that’s able to earn enough money to continue operating and to service its debts but is unable to pay off its debt.
The problem with existing in a zombie state is that if business or market conditions don’t go your way, you have no room to manoeuvre. It’s like a bullet in the head of your business: a bullet that will send you spiralling into insolvency.
Is the business closure apocalypse coming?
Despite the concern that insolvencies would spiral in 2021, now that the extended relief measures have ended and lenders have begun to take recovery action, the situation isn’t yet as bad as initially imagined.
In fact, government statistics show that less than one in five businesses reported a decline in revenue in April – the lowest reported since July 2020. In addition, nine per cent of businesses increased their number of employees and 10 per cent expect this to rise in May and beyond.
On top of this, insolvencies remain at 40 per cent lower than they were pre-COVID.
In part, this has been due to an overhaul of insolvency laws, which the Federal Government instigated in January 2021. This included making it easier for small businesses to restructure, manage insolvency and return to business viability.
It has also been due to the remarkable resilience and agility that Australian businesses have shown throughout this economically tough time.
As the year progresses, we won’t likely see the apocalypse of business closures initially expected, but rather an uplift in insolvencies in stages throughout the year, with peaks expected around now and the back end of 2021.
More insolvency reforms to save the day
Treasurer Josh Frydenberg announced at the beginning of May that he wants to further streamline Australia’s insolvency laws in an attempt to help those who may be facing business closures Australia-wide and to support business dynamism.
In this next stage, the government will consult on how trusts are treated under insolvency law and whether safe harbour provisions remain fit for purpose. They’re also considering a temporary suspension (moratorium) on creditor enforcement while insolvency schemes are being negotiated.
In the meantime, they will increase the threshold at which creditors can issue a statutory demand on companies from $2,000 to $4,000.
While the government’s proposed additional insolvency reforms will no doubt further ease the pressure, you shouldn’t rest on your laurels.
Make sure you're on top of your finances and, if you're struggling financially, take action early, rather than sticking your head in the sand. This means taking advantage of the new insolvency reforms and making smart business decisions. The sooner you act, the better the outcome.
If you’re unsure whether your business is financially viable, speak with your accountant and call in a financial specialist who can determine how you are positioned and offer advice on next steps.
While 2020 cast an apocalyptic light over 2021’s business landscape, the hoard of zombie companies falling into the pit of insolvency is unlikely to happen. However, it’s still a critical time to keep your finances in check and pay close attention to the market. If your business vitality is poor, act quickly to prevent its end.
