‘Contagion’: Experts warn ‘zombie’ businesses will drive collapses

“You can call them zombies or just call them companies that have only remained in existence as a result of all the support and the cushioning. When they are held to account they are likely to fold.”

KPMG partner restructuring services Morgan Kelly has worked on several large administrations and liquidations including in the hospitality, finance and mining services industries. Credit:Daniel Munoz

Morgan Kelly, a partner at KPMG specialising in restructuring services, warned these unviable ‘zombie’ groups risk infecting healthy companies if allowed to continue.

“Whenever we talk about a company that’s in distress it’s not a discrete issue. It affects everybody that has relationships with that company.”

“When companies collapse, they take down other companies with them. That’s why the zombie company concept is important because the longer these businesses lumber along the longer counterparties continue to provide services or provide them with goods, and the suppliers aren’t going to get paid for those. So there is a contagion effect.”

“It’s important to note, though, that sometimes zombie companies won’t know they’re zombies and nobody else does either.”

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Kelly is particularly concerned about increasing costs for businesses, including higher labour costs and growing cost of goods and services, caused by the supply chain squeeze.

“While those input prices continue to go up, you’ve got revenues being constrained in some industries, by an inability to execute.

“If you can’t deliver, you can’t sell, you can’t serve, you can’t do whatever it is your business does, and your revenue is constrained.

“At the same time you’ve also got lower profits because the cost of everything you need to supply,
including labour costs, has gone up.”

Workers at a Probuild site in Melbourne gathered items before leaving after learning of the group’s collapse.

Workers at a Probuild site in Melbourne gathered items before leaving after learning of the group’s collapse. Credit:Wayne Taylor

Shepard, who was lead administrator for Grocon group of companies which collapsed in late 2019, says the construction industry was of most concern at the moment.

“Construction is certainly driving more opportunities for us on a formal and informal basis. It’s at all levels, from large construction companies, to developers dealing with stressed builders and to construction companies dealing with subcontractors that are in distress.”

Shepard says the first groups to feel stress will be mum and dad subcontractors, that is those small business that service or supply the construction industry that are family run and do not have the financial capacity to cover the loss.

“Many of these businesses will have fixed price contracts or similar arrangements that do not allow them to pass on the cost increases that are moving quickly. There might be an ability to pass on some costs, but many of those costs are now much higher than what they’re able to pass on or absorb.”

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“So if you’ve got pre-COVID construction related contracts and you’re still working on it. You’re probably working for nothing.”

The ATO has historically been one of the most common creditors in a business collapse. It confirmed it had increased its collection activity in the past two months.

“We understand that a lot of people – especially small businesses – have done it tough through COVID and may now have a tax debt,” said ATO Deputy Commissioner Vivek Chaudhary.

“Our message is – don’t stick your head in the sand – even if you can’t pay the full amount owed straight away, please contact us or your registered tax professional to discuss and we will work with you to set up an appropriate payment arrangement. We cannot help taxpayers who do not engage with us.”

Chaudhary said where taxpayers were not engaging with the ATO, the agency was taking firmer actions.

“Our debt collection activities prioritise those taxpayers representing higher risks and refusing to engage. That is why our initial focus will be on taxpayers with higher debts before including taxpayers with all other debts.”

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