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How to Tell if Your Company is a Zombie Company (and what to do about it)

Posted by Lanyana Financial Group on Aug 14, 2020 2:00:00 PM

It’s no secret that Australian businesses have suffered enormously due to the Coronavirus (COVID-19), with many businesses now facing financial challenges they never expected to endure.

Many companies, especially those in the retail industry, were struggling financially well before the crisis hit. Just this year we saw Kikki.K and Colette by Colette Hayman enter administration, with EB games closing a number of stores across the country.

For businesses who were already facing financial distress and may have been unviable, the introduction of Government stimulus due to COVID-19 (especially the JobKeeper scheme) has seen many companies go into hibernation mode, continuing to stay afloat with Government assistance alone. The latest figures from the Treasury show that 728,640 businesses have now enrolled in the JobKeeper scheme, covering around 2.9 million employees.

These companies are most at risk of insolvency once the JobKeeper scheme finishes in September, giving them the unwanted title of a Zombie Company.

It’s important you understand exactly what a Zombie Company is, the issues related to being a Zombie Company and the options available if your company is in this category.

What is a Zombie Company?

A company is seen as a Zombie Company if their resources are stretched thin, letting them meet immediate financial obligations but not allowing them to pay down debt. Instead, a Zombie Company’s expenses and debts are continually increasing. In the current environment,  a Zombie Company can only survive because of:

  • Government financial assistance for COVID-19 affected businesses through JobKeeper and Cashflow Boost,
  • Record low interest rates, and
  • Temporary change in insolvency laws, preventing the ATO, banks and other creditors from taking debt recovery action to wind-up the company.

The OECD says that Zombie Companies represent a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies.

5 Key Signs Your Company May be a Zombie

For many business owners and company directors, the stark reality of the COVID-19 pandemic may mean learning the hard way that your business is not viable or sustainable to continue operating.

Roger Mendelson, Chief Executive of Prushka, told SmartCompany that “there will be businesses in September which won’t be able to pay their bills but may have been propped up by JobKeeper. There will be a lot of technically insolvent companies. The question is whether creditors will take action to wind them up.”

If your company is experiencing any of the below signs, it’s important to take action now and seek professional assistance to avoid any risks of trading insolvent or being forced into liquidation once Government assistance decreases in September. Also as a company director, insolvency brings with it many risks for you personally if you’re found to be trading insolvent.

Key Signs

Common indicators of a Zombie Company are:

  1. You’re not generating enough income to meet your fixed expenses (or won’t once JobKeeper ends).
  2. You can’t pay down debts that are accumulating on the balance sheet.
  3. Your company’s business model isn’t going to be viable in the foreseeable future.
  4. Your company is losing customers at a faster rate than you’re gaining them.
  5. You’re unable to invest in new business or hire new staff.

Why are Zombie Companies Bad for Business?

Zombie Companies generally make bad decisions to stay afloat. Undercutting prices to win work, not paying debts and often cutting corners leaving customers dissatisfied and out of pocket. Ultimately, they hurt the directors, their suppliers, their staff, their customers, industry and the economy.

1. They’re hurting themselves.

The directors of Zombie Companies are hurting themselves by continuing to survive under a mountain of company debt and, possibly, personal debt. If your company is struggling financially, but you believe your business can be successful, you could consider the option of buying it back and starting over. You could do this by buying it back from a liquidator during the liquidation process, or arranging the sale prior to liquidation. In this case, you need to be aware of illegal phoenix activity and ensure the sale and restructure is legal. By putting your company into liquidation and buying it back, you’ll have the opportunity to start fresh as a new business.

2. Employees are affected.

If you’re a director of a Zombie Company, you may think that continuing to meet employee wages by way of the JobKeeper payment is enough to keep your staff on board. You may believe you’re doing the right thing, however, JobKeeper is not enough to cover employee superannuation which may continue to go unpaid if the company is a zombie. Not only does not paying employee superannuation effect your staff, it can lead to company directors becoming personally liable for the company’s debts – or worse, hefty fines or jail time.

3. They put company directors at risk.

The increased financial loss is the primary risk from Zombie Companies. Company directors also risk their reputations, finances, health and relationships which can suffer with the stress of trying to deal with a business that doesn’t make money. Additionally, you’re investing your time and resources into a venture that will inevitably close, whereas you could be out there making money, stressing less or working towards a new venture.

4. They’re bad for the economy.

The debts that Zombie Companies cannot afford to repay will affect good businesses, reducing the capital that banks have available to fund ventures and holding back employees from finding more productive jobs. Government money that is being used by these businesses may not be generating any value – for example, if the business is closed – and may not generate any value in the future. While Australians will have to repay the Government debt created from JobKeeper and JobSeeker, there is no public benefit when the people employed by that business could instead be working in other, more productive areas of the economy.

 What to do if You’re the Director of a Zombie Company

If you believe you’re running a Zombie Company, there are three steps you need to take:

1. Assess if your business is viable and worth saving.

The first step is to assess your business’ finances to determine if the company is viable and worth saving. Our professional team at Lanyana Financial Group can perform a business health check, which includes a comprehensive analysis of your business’ financial health and outlines the options available moving forward.

2. If the business is viable, but not in its existing form, look at restructuring or downsizing to return to profitability.

If acted upon early, a business turnaround or restructure may help your company survive and continue operating into the future. The aim of a business turnaround is to buy time to transform the business so it can support itself, increasing revenue and returning the company to profitability. Turnaround activities can include:

  • Selling assets,
  • Closing some product lines or departments and building others,
  • Adjusting the work force,
  • Competitive repositioning,
  • New pricing,
  • Improving operations, and
  • Refinancing.

Due to COVID-19, the Australian Government introduced new temporary safe harbour protection from liability for insolvent trading. These safe harbour protection measures can help your company survive these challenging times. These changes, however, are only temporary and once the 6-month moratorium ends on or around 25 September 2020, if your company is found to be insolvent, you may be held personally liable for the company’s debts.

3. Consider how to deal with any accumulated debts.

Once Government support finishes in September, your company may have accumulated debts it will now need to repay. Informal negotiation with suppliers and the Australian Taxation Office (ATO) may result in affordable payment plans. However, if your company is facing insolvency, you may need a formal insolvency appointment to return debts to a manageable level.

Appointing a Voluntary Administrator can bind your creditors into a Deed of Company Arrangement (DOCA), allowing your company to repay its debts at an affordable amount over a set period of time.

If your company is in severe debt and your business is unviable, it may be a good idea to put your business into liquidation. Liquidating your company clears supplier and ATO debts, allowing you to gain closure and move on.

Wind Up Your Company Now

Government stimulus has provided a lifeline to thousands of companies across Australia who may have been struggling financially before COVID-19 hit. However, this has led to an increase in Zombie Companies only surviving due to being propped up by Government help. Don't wait until September to get help.

If you’re the director of a Zombie Company, it’s important to act quickly and wind up your company now, instead of waiting until creditors force you into liquidation once stimulus measures end. Get in touch with us today on 1800 534 534 to have a free, confidential chat with our in-house Administrator.

First published on Revive Financial.

Topics: Business Debt

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