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Zombie firms ‘will lead march to insolvency’

A wave of wind-ups is about to hit after two years of limbo, says Insolvency Australia.

Business Lorena Biasotti 11 May 2022
— 1 minute read

Insolvencies will strike Australia in the second half of the year led by zombie companies and businesses that have exhausted their cash reserves, said one insolvency specialist. 

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A director of Insolvency Australia, Gareth Gammon, said zombie companies were at the forefront of this trend, but insolvencies across the board would rise.

“I’m hearing from Insolvency Australia members that there will also be an increase in ‘legitimate’ trading companies seeking insolvency or restructuring support, particularly those that have exhausted their cash reserves and are getting knocked back for funding or forbearance,” he said.

“After two years of limbo for the insolvency sector, we are seeing a rising number of external administrations and while the levels have not yet returned to normal, there’s an expectation that will occur over the next 18 months or more.

“Zombie companies” are businesses able to cover most of their running costs but fail to generate profit margins.”

Mr Gammon said triggers for insolvencies included the ATO ramping up debt collection, inflationary pressures, and jitters around the election.

In a recent poll of registered liquidators and bankruptcy trustee members, Insolvency Australia found most believe there will be a rise in insolvency starting around tax time and then again later in the year after interest rate hikes and inflation have truly set in.

Insolvency Australia member Bob Jacobs, head of Auxilium Partners, said: “The first to fall are businesses which are no longer viable due to social changes post-COVID, or intrinsic financial instability deferred by COVID.

“Major reasons for that are: firstly, government support during COVID put many unviable companies into a holding pattern; and, secondly, the special pandemic laws that prevented insolvency are no longer in force, meaning the ATO and creditors can collect outstanding debts.”

Nick Cooper, managing partner of Oracle Insolvency Services and another Insolvency Australia member, agreed that some industries were more likely than others to suffer as a result.

“The sectors most under pressure include hospitality, due to likely restrictions on consumer discretionary spending, and building and construction, due to labour shortages and an increase in costs on fixed-price contracts,” he said.

As the nation’s only insolvency comparison site, Insolvency Australia enables business owners and directors, individuals, and advisers to search for, compare and connect with registered liquidators and bankruptcy trustees around Australia.

The service is independently owned and is free for site users seeking advice.

Zombie firms ‘will lead march to insolvency’
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Lorena Biasotti

Lorena Biasotti

Lorena Biasotti is a cadet journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.

After completing a Bachelor of Communications at Western Sydney University, Lorena joined the Momentum Media team in 2022. She has previously written for Junction Journalism and Artist Profile, covering politics and arts and culture.

Business