Australian businesses must be allowed to fail or they risk ‘derailing’ the country’s economic recovery, creditors warn

Some Australian businesses are still running that should have long been retired. (Patrick Pleul, picture alliance via Getty Images)
  • Australian businesses are being permitted to operate while insolvent until September 2 under special COVID-19 provisions.
  • While those changes were welcomed, it’s now time to let them expire and allow businesses to fail, Australian creditor bodies have urged.
  • If not, CreditorWatch warned “there will almost certainly be a deluge of insolvencies when the moratorium ends, prompting a catastrophic decline in business confidence and derailing any opportunity for near-term economic recovery.”
  • Visit Business Insider Australia’s homepage for more stories.

The Australian government should stop propping up businesses and let the chips fall as they may, the nation’s credit bodies have urged.

As the coronavirus pandemic shut down businesses and cut off spending, the federal government introduced emergency ‘safe harbour’ provisions to allow businesses to operate while insolvent to see them through until September 25.

However, while the cushion was welcome relief for businesses at the time, credit agencies say it’s now high time for the exemption to expire, urging the government not to extend it like it has other support measures.

CreditorWatch, in a white paper released on Tuesday and co-authored with other industry bodies, lobbied the government to stick to its deadline and have companies begin reviewing their bottom line and taking the appropriate action.

“If these steps are not followed, there will almost certainly be a deluge of insolvencies when the moratorium ends, prompting a catastrophic decline in business confidence and derailing any opportunity for near-term economic recovery,” it warned.

Removing the spectre of bankruptcy from the world of business was akin to having “Catholicism without hell.. yet this is the situation in Australia right now when it comes to insolvencies,” it said.

Supported by the Australian Institute of Credit Management and the Australian Restructuring Insolvency and Turnaround Association (ARITA), the trio argue support measures have propped up so-called ‘zombie businesses’, which continue to survive and slow down the business cycle.

With insolvencies having so far halved this year compared to last, and with businesses under far greater pressure, CreditorWatch puts the number of zombies in the thousands, hurting good businesses as a result.

“These insolvent businesses are running even higher debts, costing creditors even more money. When they are eventually and necessarily wound up, there will be less than nothing left for creditors, likely putting those creditors at risk of collapse,” ARITA CEO John Winter said.

Payment delays have already more than trebled over consecutive months according to the trio.

“Our members tell me their debtors are saying, ‘Don’t even call me about debts, because the government has said I don’t need to pay them’, which is very far from the truth but that’s something our members are combating on a daily basis as they try to engage with their debtors,” AICM CEO Nick Pilavidis said.

By reintroducing insolvencies, bad businesses can be weeded out as they emerge, the three atgue, without risking more widespread collapse of businesses, confidence, and the recovery effort.

More can be done to ease the pressure on business

However, it may not be so simple as to just let businesses crash and burn. After all, the pandemic has changed the overall economic reality.

More than one million Australians are officially unemployed while hundreds of thousands more have simply left the workforce. JobKeeper meanwhile is supporting in the realm of 3.5 million jobs, while around $80 billion in business loans have been frozen for now.

It’s a reality perhaps acknowledged by the creditors themselves, with only around half of CreditorWatch and AICM members rejecting an extension to the temporary safe harbour measures.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell instead has lobbied for targeted measures to ease the pain for the smaller end of town.

“Unfortunately, there are a number of businesses that may not be able to recover, many of which were already struggling before the multiple hits 2020 has delivered. For these businesses, and future businesses, it is critical that the process of winding up is quick, orderly, and dignified,” she said.

Last month, Carnell urged the government to introduce vouchers of up to $5,000 for owners under significant stress to seek financial advice.

Not dissimilar to loan deferrals implemented by the banks, Carnell also wants small businesses to be able to freeze debts and bills for three months or more.

Where administration is unavoidable, owners should be able to submit proposals on how to proceed, Carnell argues, with it producing a win-win for all involved.

“If the small business owner, with the approval of a registered liquidator, could restructure their affairs, it would likely lead to more positive outcomes, including a greater return to creditors,” she said.

In any case, where businesses can’t be helped out, they may simply need to be tied up.