So the Morrison government has extended its insolvency protections for small business owners impacted by COVID. That’s a good thing, right?

While small business advocates are heralding the announcement as a win for businesses owners, allowing them temporary relief from bankruptcy, there are some concerns the protections are propping up zombie businesses.

Extended insolvency protections a relief for small businesses

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell has welcomed the announcement which reduces the threat of creditors taking action against small businesses impacted by trading restrictions.

The protections, which have been extended to December 31, also extend the temporary relief for directors from any personal liability for trading while insolvent.

“These necessary measures give otherwise viable small businesses more time to recover, preventing a wave of unnecessary insolvencies,” said Carnell .

Still, Carnell said it’s likely the measure will also keep a number of zombie businesses artificially afloat.

“ASIC data shows insolvencies are tracking at close to 50 per cent below 2019 levels, which goes to show the extent to which government stimulus and protection measures are keeping businesses on life support, including businesses that have not been viable for some time.” she said.

Similarly, data analysed by Prushka Fast Debt Recovery has shown a 53 per cent decrease in voluntary administrations for the Jun-Aug period, year on year.

Prushka CEO Roger Mendelson warns these figures and the extension announcement, coupled with the 64 per cent decrease in wind up applications for the Apr-Jun quarter, is causing a backlog of cases that will result in a tsunami of liquidations in the future.

“This backlog of cases could cause major economic dislocation post-COVID in a time where we will need entrepreneurs thriving and small business owners working towards rebuilding,” Mendelson said.

It’s a concern shared by small business owners. Chrissie Maus, General Manager of the Chapel Street Precinct Association commented:

“The economic fallout of the pandemic in Metro Melbourne will not happen until the insolvency laws cease and JobKeeper also tails off…

“The worst of this will be seen and certainly felt in Chapel Street Precinct early to mid-next year when those two ‘lifelines’ dry up. The extension of the insolvency laws (that were announced yesterday) are welcomed, but sadly a double-edged sword as for some it is potentially going to most likely prolong the inevitable closures.”

Carnell says Deloitte Access Economics modelling estimates about 240,000 small businesses are at risk of failure. She believes these figures highlight the critical need for small businesses to sit down with their trusted financial adviser for a viability assessment.

“My office continues to recommend the establishment of a small business viability voucher program, where small business owners facing financial stress can obtain a voucher valued up to $5,000 to access tailored advice on the state of their business.

“Unfortunately small businesses with cash flow issues, compounded by falling revenue, may not seek out professional advice because it’s deemed to be unaffordable. This could prove to be devastating for the business owner and their family, down the line.

“We know the sooner a small business owner experiencing financial stress seeks assistance from an accredited professional, the better the outcome,” Carnell said.

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