Waves of ‘zombie’ company failures predicted as Covid support withdrawn – Stuff.co.nz

Waves of zombie company failures are expected by the insolvency industry as the support mechanisms that have prevented non-viable companies from going bust are withdrawn.

Despite the June quarter GDP figures revealing a drop in GDP of 12.2 per cent, there were fewer liquidations of companies in July and August than in the same months in the previous two years, figures from the Restructuring Insolvency and Turnaround Association New Zealand (RITANZ) show.

Karen McWilliams from Chartered Accountants Australia and New Zealand, did not expect that to last, and predicted a series of waves of business failures similar to those seen after the last of this countrys many major economic shocks.

CHRIS MARSHALL/Stuff

Some businesses have closed but not as many as might be expected in such a downturn.

We saw a number of waves of insolvencies in the two years after the global financial crisis, and we are probably going to see it come in various waves again, McWilliams said.

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The failures would include some companies that would already have gone under but for the financial support schemes put in place by the Government and the banks, she said.

The wage subsidies, various tax relief measures and a safe harbour from insolvent trading for directors had achieved their overall aim of keeping Covid-hit businesses at least ticking over, McWilliams said.

There have been concerns in Australia that insolvency practices would fail during the pandemic, reducing capacity to deal with the liquidations which would eventually emerge.

Some New Zealand insolvency practices which experienced sharp drop-offs in business during the national lockdown ended up having to ask for help from the wage subsidy scheme.

Waterstone Insolvency received $105,464 from the wage subsidy scheme, while Palliser Insolvency got $28,118.40, BWA Insolvency got $35,148, and PKRF Corporate Recovery and Insolvency (Auckland) got $42,177.60.

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Waves of company failures are expected as Covid-support mechanisms for businesses are withdrawn, says Karen McWilliams, Chartered Accountants Australia and New Zealands Business Reform Leader.

But McWilliams did not think the New Zealand insolvency industry would struggle to cope with the increased volumes of liquidations which would emerge as the support mechanisms were withdrawn.

Already, applications to the wage subsidy scheme have ended, and the Governments other two business support schemes saw low numbers of applications.

At the end of August just 834 companies had been accepted for loans under the Business Finance Guarantee scheme, with just $176m lent through the scheme.

And just 13 companies had been accepted into the Government Debt Hibernation Scheme, the Ministry of Business, Innovation and Employment said.

By contrast a huge number of businesses were approved by banks to make lower repayments on their loans, or postpone repayments altogether.

By the end of August, the New Zealand Bankers Association said its member banks had allowed 15,135 businesses owing $18.3 billion to make reduced repayments on loans.

A further 3404 had been allowed to postpone all repayments on a combined $1.2b of loans.

Another 4098 businesses had been granted loan restructures, which included measures such as extending the number of years over which the loan could be repaid.

The measures are working, but theres probably the sense that banks, and a lot of other creditors have been encouraged to be a bit more generous at the moment in terms of not pushing for insolvency, McWilliams said.

She expected that to change for businesses which did not have long-term viability.

There are businesses out there which would have failed under normal economic circumstances, McWilliams said.

ANZ chief economist Sharon Zollner has said because those zombie firms had not failed in the way that was normally expected, they had not cleared space in the market for new and potentially more innovative businesses to take their place. There was no way to measure what the impact of that on the countrys economy would be, she said.

McWilliams urged business owners to get advice on their positions as postponing liquidation for non-viable businesses could result in debts mounting even further.

The mental health impacts also accumulate, she said.

Getting advice and seeking people to talk to was also the advice of Christchurch man Lester Bryant, who wrote about his experiences of losing a business in Going Broke.

His experience of losing a business has made Lester Bryant sceptical of professional advisers, and leary of personal guarantees.

The decline in company failures during the Covid pandemic was mirrored in personal insolvencies like bankruptcies, no asset procedures, and debt repayment orders.

In July and August, there were 176 personal bankruptcies compared to 225 and 271 in the corresponding months in 2019 and 2018.

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Waves of 'zombie' company failures predicted as Covid support withdrawn - Stuff.co.nz

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