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‘Zombie’ companies to drive insolvency spike in second half

An Australian insolvency specialist believes wind-ups will spike in the second half of the year as businesses run out of cash reserves.

12 May 2022 

Insolvency Australia Director 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.”

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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 that 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 And secondly, the special pandemic laws that prevented insolvency are no longer in force – meaning the ATO and creditors can collect outstanding debts.”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.

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