Alarm sounded over potential tidal wave of insolvencies

New research suggests that government measures to prop up “zombie” businesses in the pandemic-induced economic crisis may be detrimental to Australian small businesses in the long run.

According to the data Prushka Fast Debt Recovery sourced from court records, the Australian Taxation Office and other government agencies have halted their winding up of businesses in the past quarter. In April to June, 374 businesses issued Notices of Winding Up Applications, a decrease of 47 per cent compared to the last quarter, and 64 per cent year-on-year.

Prushka CEO Roger Mendelson warned that while the government’s initiatives to support businesses through the COVID-19 pandemic were helping keep companies afloat, it will cause a backlog of wind-up and bankruptcy cases and may give rise to an insolvency crisis.

“From April, the government issued several temporary changes to support financially distressed businesses, including extending the time companies have to respond to a statutory demand from 21 days to six months. This has caused an incredible slowdown in the debt collection process,” Mendelson said. “This backlog of cases could cause major economic dislocation post-COVID in a time where we will need entrepreneurs thriving and small business owners working towards rebuilding.

“If the government were to extend these measures, Australian SMEs would be restricted from taking action to protect their livelihood and it could also encourage irresponsible businesses to incur debts they have no hope of paying,” Mendelson added.

Prushka’s data from its 58,000 small businesses client base showed SMEs are referring debts much earlier, with Victoria issuing the largest number of wind-up applications at 169 reports, or 45 per cent of all applications during the last quarter, followed by New South Wales.

“We’ve seen a 64 per cent decrease in the average size of debts for April and May this year compared to last which indicates that Australian SMEs are focusing on cleaning up their smaller outstanding debts to boost cashflow,” Mendelson said.

“We’ve also seen a 41 per cent increase in the number of debtors seeking instalment arrangements during the pandemic compared to 2019, suggesting businesses and consumers are preserving cash in every way possible.”

Mendelson also warned that the figures presented in the research are modest and may end up higher, describing them as “just the tip of the iceberg”, with the likelihood that many more companies are technically insolvent but, however, not be commercially viable to wind up.

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