Need to confront an impending “tsunami” of business collapses
The day after Alan Kohler’s recent pronouncement there would a “tsunami” of 100,000 Australian business collapses in October as Federal Government COVID-19 support programs were restricted or withdrawn, Macks Advisory Principal Peter Macks was challenged by ABC Mornings Host David Bevan to say what needed to be done effectively to confront this inevitable disaster.
Representatives of leading business organisations, who with Peter Macks had been invited to Collingswood by the ABC to comment on the Kohler pronouncement, said it was substantially short of reality. Indeed an Australian Bureau of Statistics (ABS) survey indicated 10% of Australia’s 2.3m businesses would not survive the COVID-19 crisis – 230,000 rather than 100,000.
However, Australia’s insolvencies, normally 700 to 800 a month, are now down to about half that, which Mr Macks said was because thousands of unviable businesses were still able to exist essentially by way of government crisis support packages.
However, long before the current crisis, many of these businesses were unviable. Traditionally activators of insolvency actions – principally the Australian Taxation Office and the major banks – would by now have launched court actions against them, but this hasn’t been possible because of protective temporary changes to the Corporations Act.
Mr Macks said COVID-19 highlighted a problem that had been brewing for years as increasing numbers of unviable companies that were failing to meet their tax obligations and obligations to other creditors, morphed into so-called Zombie Companies that have been costing the Australian economy up to $5b annually.
The frustration now for firms like Macks Advisory is a situation that denies them opportunities to deal with collapsing companies in time to save worthwhile businesses or at least some assets for creditors.
The Federal Government’s dilemma
The Federal Government is between a rock and a hard place on this issue. If it lessens its current support or suspends some of it, many a fundamentally sound business will now go to the wall along with the zombies. If it makes no serious effort to wean businesses off life support, then countless good or potentially good businesses will be dragged to destruction by bad ones that won’t or can’t pay bills on time.
There are businesses that have been using government support mechanisms to pay down debt occasioned by directors in the past, or to enable them, despite contraction in bank funding, to continue lurching along as zombies towards inevitable collapse with consequential disaster for their creditors.
As things are, payment times for invoices in the past few months have gone from 11 days beyond due dates to 49, and increasingly are now not being paid at all. Bad businesses, many of them run by dodgy directors who believe temporary suspension of laws relating to insolvent trading allows them to proceed on their dodgy ways hindered, are in for a rude shock in the not-too-distant future.
Directors now behaving badly should note although laws that normally would have allowed legal action against them have been temporarily suspended, they will be held responsible for not fulfilling their current legal duties once the suspension is lifted. (insert link)
If there is political odium to be faced in doing what needs to be done to modify current support programs and to put a stop to poor management and directors’ bad behaviour, then the Government has an obligation to recognise it and face it – but let’s not politicise it.
It has long been a conviction of Macks Advisory that governments have a prime obligation to create an environment in which business can flourish.
Peter Macks told ABC listeners he believed COVID-19 presented the Federal Government with an ideal opportunity to do what has needed doing for years, namely to promote “a general clean-out” of businesses and directors impeding the economy. It should be enabling the recycling of companies where the underlying fundamentals of businesses are sound, and there are entrepreneurs in charge ready to undertake vibrant activity. You can read more about the economic fallout and Government response to the COVID-19 pandemic Here.
Government procrastination in creating a business climate in which companies “clearly not up to the mark” will disappear and where fundamentally sound companies will flourish, is a cost Australia cannot afford.
How should this be done?
Mr Macks hopes the Morrison Government will consult extensively with insolvency practitioners and business organisations before resetting or updating existing support measures for businesses.
He believes these measures should be tailored to assist all businesses where it’s seen their fundamentals confirm viability.
“Even in the most complex businesses expert insolvency practitioners are able to drill down and find out what the real drivers are –- among them for example, brand, labour, or contacts in markets”.
It’s imperative in Mr Macks’ opinion that State and Federal Governments confer with these experts and representatives of the business community to determine the most effective ways of ensuring legislation and other COVID-19 support measures focus on long term survival of viable businesses.
The more valid businesses survive the corona virus crisis, the greater will be governments’ sources of tax revenue and the better off the economy will be.
Banks, appreciating this is in the national interest as well as their own and many customers’ interests are also busy trying to determine which among them to support and how this should best be done –
for of course banks themselves need customers to survive, particularly those customers likely to be able to pay off loans.
There could scarcely be a more important time, a more pressing need, and a better opportunity for businesses, banks, governments, and businesses to forge relationships based essentially on trust.
Steps to post-crisis success
Peter Macks said it was clear from his own firm’s contacts that SMEs believed improved levels of engagement with senior bureaucrats is vital in achieving post-crisis success in a business world totally different from what it is now.
He said SA’s SMEs need bureaucratic support in establishing markets interstate and internationally, sufficient in number, strength and reliability to ensure sustainability of their businesses.
“There are increasing numbers of very good businesses in this State -- some in their infancy -- that will only be sustainable by way of interstate and international sales. Clearly good results from great assistance the government has given in the past in this field, should serve as encouragement to do more -- particularly as indications are SA seems likely to go forward from the COVID-19 crisis better than most places on earth.”
But obviously many businesses won’t go forward. These are scary times, but owners of businesses now floundering should not sit frozen like rabbits in a spotlight. If yours is such a business, contact an experienced advisory firm immediately. Extensive experience is vital.
We at Macks Advisory have held the hands of many business owners through restructuring processes, through their traumas of having to deal with associated intransigent and unviable companies, with complicated government and legal requirements, all while trying to discover option available to them to avoid disaster.
Even if you believe the worst has already come to the worst and your business hasn’t a future, nonetheless, consult an experienced insolvency practitioner forthwith. This could well save assets, that without the right advice, you would most certainly lose.