During the pandemic, an unprecedented level of fiscal support was provided to Australian companies. Many struggling firms were able to survive, sustained by a steady diet of taxpayer capital, existing in a commercial fantasyland. Additionally, record-low interest rates during the pandemic enabled businesses to access cheap loans in an attempt to stimulate the economy.
These factors contributed to a zombie company apocalypse. Fortunately, their time of reckoning has finally arrived.
What is a zombie company?
The term “zombie company” is used to describe a distressed company. There are two widely used descriptions of zombie companies. The first definition describes these companies as entities with extensive debt, with revenue that covers fundamental running and fixed costs (rent, wages, debt servicing, etc.) thus enabling an unprofitable, but continuing existence.
The second definition refers to indebted companies that have ceased trading and fail to respond to debt collection efforts. These businesses typically carry relatively small debts, but the cost of pursuing debt recovery or winding-up applications often makes legal action commercially unviable. With no access to credit, they are unable to resume operations.
Why are zombie companies a danger to the Australian economy?
Zombie companies weaken economic growth. They tend to be less productive and delay the growth of more viable businesses by consuming unnecessary resources, unfairly affecting the competitive environment. This congestion acts as a handbrake on industries in which zombie companies operate within.
What is happening to zombies in the current insolvency landscape?
Australia is currently experiencing a significant number of insolvencies. A large proportion of these are liquidations. Many of these liquidations are zombie companies. While the media loves to sensationalise insolvency statistics, it is important to remember that liquidations essentially remove the ‘dead wood’ allowing resources to be reallocated to strong Australian businesses.
Businesses facing financial distress, with the potential to regain viability, can explore alternative solutions, such as small business restructuring.
The takeaway
Insolvencies are on the rise, bringing zombie companies’ demise. The business cycle is brutal, yet effective, in reinvigorating the Australian economy. An increase in insolvencies is an unavoidable part of this process.
