SYDNEY (Reuters) – Australia is facing an avalanche of business failures in the transportation sector and its hospitality after government subsidies expire in September, said bankruptcy lawyers and economists, while some argue that the so-called ‘zombie’ companies should be allowed to fail.
Around 240,000 businesses in tourism and high-risk professional services failed during the September ‘fiscal cliff’, when widespread wage subsidies will end, economists said at Deloitte on Monday.
Despite the pain, it has never been more important to let ‘zombie’ companies with endemic operational weaknesses fail, allowing capital to flow into productive companies that are important for economic recovery, they said.
“Money that only circulates in businesses that don’t really provide effective output for the economy is a problem,” said John Winter, chairman of the Australian Insolvency & Turnaround Restructuring Association.
“The challenge with businesses that should have gone bankrupt in this period, but not because of government stimulus, is that they are still piling up debt, and that debt is for someone else.
“It could be a bank, it could be the owner, but it could also be another business, their supplier, so it’s not a victimless crime when you let a zombie company trade while bankrupt.”
In March, completing the A $ 160 billion stimulus package, Australia canceled unfinished trade obligations to businesses and extended creditors’ notice periods to crack down on debt, leaving many companies to trade without paying rent, taxes and loans.
The bank alone has around 220,000 business loans worth more than A $ 60 billion on loan repayment holidays and as time passes until September, analysts say the risk of foreclosures “en masse” is increasing.
“We believe this will greatly burden small businesses that employ 35% of the workforce,” UBS told clients in a note.
“When wage subsidies, rental assistance and loan suspension are over, this can lead to a second wave of unemployment.”
About 40% of businesses in hospitality, professional services and transportation say they only have cash for operations in less than three months, Deloitte reported.
“I think this will be very challenging,” said Maria O’Brien, head of Baker McKenzie’s bankruptcy restructuring and practice in Australia.
“I anticipate that there will be a large number of companies that go bankrupt, because revenue will not return – they will not return soon and they may never return in various sectors.”
But while further fiscal stimulus is expected, some businesses must accept voluntary administration, some argue.
This bankruptcy process is similar to Chapter 11 in allowing a moratorium on certain creditor claims, which might offer the best way to help businesses survive.
“When used properly, administration can be an efficient and cost-effective restructuring tool,” said Deloitte Access Economics partner Kristian Kolding.
“The public also needs to overcome the historical stigma associated with external administration.”
Reporting by Paulina Duran in Sydney; Editing by Clarence Fernandez