Insolvency protections must end as planned

The Morrison government is being urged not to extend its insolvency protections for business beyond the end of the year to ensure zombie firms aren’t putting good ones at risk.

Credit reporting agency CreditorWatch says the temporary moratorium on insolvent trading has served Australia well during the severe economic contraction caused by the COVID-19 lockdowns.

But CreditorWatch CEO Patrick Coghlan says the economy is now on its way to resuming normal trading conditions.

“Extending this provision for all businesses will only kick the can further down the road by allowing insolvent businesses to remain open and potentially put good businesses at risk, which are offering payment terms to zombie businesses that should have shut their doors months ago,” he said.

However, he said if the government was to extend the measures beyond the December 31 end date, it should only apply to small businesses with annual revenue of less than $10 million.

Small firms don’t have the same cash reserves and access to debt funding as large businesses, he said.

Separately, Mr Coghlan supports the sentiment behind the government’s draft legislation to simplify administration and liquidation for small businesses.

Due to start on January 1, 2021, the proposed legislation allows small businesses with debts of less than $1 million to remain in control of their operations for 20 days while they come up with a restructuring plan.

“We support the legislation in principle as it should make it much simpler for small businesses to wind up their operations. But we need more detail on what the government is proposing,” Mr Coghlan said.

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