The Rise of the Zombie Companies

Insolvency | Snapshot

The Rise of the Zombie Companies

Extending the lifeline for businesses and zombie companies due to the extension of temporary relief to “insolvency laws” until 31 December 2020.

On 7 September 2020, the Treasurer announced that the temporary relief to various “insolvency related laws”, originally enacted to avoid unnecessary business closures and bankruptcies as a result of the COVID-19 pandemic, would be extended for a further 3 months to 31 December 2020.  This announcement comes just weeks before those measures were due to expire on 26 September 2020.

Given the extension to the JobKeeper Subsidy and the temporary insolvency relief, we wonder whether the COVID-19 rent relief (due to expire in October 2020) will also be extended?

Be in the know for your clients

The temporary changes to insolvency law in response to the COVID-19 pandemic, now been extended from 26 September 2020 to 31 December 2020, are as follows:

  • Relief of personal liability for insolvent trading – even if there is a breach of the duty of company directors to prevent the company from trading whilst insolvent (so long as debts are incurred in the ordinary course of business – which is a low bar & subjective).

  • Extension of the time for compliance with a creditor’s statutory demand – usually 21 days to 6 months – and increase of the minimum debt that may be the subject of such a statutory demand (from $2,000 out to a substantial $20,000). There are also similar reforms for bankruptcy proceedings against individuals for the minimum debt increase from $5,000 to $20,000.

  • The Government’s stimulus package and temporary insolvency relief was enacted in March 2020 to prevent an avalanche of business closures and bankruptcies as a result of the COVID-19 pandemic. However, the effectiveness of these measures were grossly underestimated and have correlated with a considerable reduction in formal insolvency appointments with a 65% dropped in August compared to the same time last year.

This indicates that there are businesses out there now, continuing to trade and incur debt, that would have closed their doors, if not for the Government’s stimulus package and temporary insolvency relief.  These businesses are aptly dubbed zombie companies).

If you have clients or you are operating or dealing with a zombie company, you should seek qualified professional advice prior to 31 December 2020 to understand your options and avoid the fallout in January 2021.