The new pandemic: Zombie companies will eat Australia’s COVID-19 economic recovery

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Publication May 2020

A critical feature of any insolvency process is to facilitate economic efficiency – specifically, enabling resources to be used most optimally and, where a distressed company has no realistic prospect of resuming trade, terminating its existence and allowing capital to be recycled and reinvested in other productive ventures.  

This is essential to ensure long-term productivity and economic growth on a macro level. If scarce capital is tied up in loss-producing companies and projects, the economy will quickly stagnate. After all, innovation, adaptability and flexibility are the hallmarks of economic success.

This underlying economic policy is reflected in the statutory objects of the voluntary administration process in Part 5.3A of the Corporations Act. If corporate or business rescue is not realistic then the administrator’s task is, according to Section 435A(b), to maximise the available return for creditors. 

The economic context cannot be overstated as we now, as a nation, look towards the rebuilding process in the next COVID-19 response period. The crisis is now as much economic as it is health-related. Now, more than ever, it needs to be emphasised that saving all companies – even when they are not viable and were in financial difficulty well before COVID-19 – is not always a good thing.  

Of course, a company is not just an artificial entity. Behind every company sit employees (so many of whom are now out of work due to COVID-19), suppliers and customers. And many companies are in a very real way the lifeblood of their local communities.  

But it is simply not realistic to prop up companies that were already facing pre COVID-19 endemic operational issues. As the Commonwealth Treasurer said in his Ministerial Statement to the House of Representatives on 12 May, we cannot imagine that we can pluck from a ‘money tree’ in any of this.

Even beyond economic efficiency, on a fairness and equity level, let us remember that every dollar of government debt incurred today will need to be repaid by future generations. 

In this context, there is growing industry concern that the proactive and impactful stimulus and support measures adopted in Australia could be used by entities that were already operating under unsustainable business models before COVID-19 to continue under a skeleton structure without a realistic prospect of successful trade once the current demand and supply shocks to the economy subside. This could indeed spark a pandemic of a different kind – that of the ‘zombie company’, with entities taking advantage of subsidies and a benign financial market (with historically low interest rates) to keep open the doors to businesses that will never be self-sustaining – all while tying up the very capital investment needed to support new projects and business models in a post COVID-19 world.  

We need to have an honest conversation that some of the business models that were so successful when the clock ticked over into 2020 may no longer be sustainable in the circumstances we now find ourselves in. The move to online service delivery, takeaways and reduced physical floor space is likely to become the new norm and this will have a significant impact in the hospitality and retail sectors especially. And investment in technology, telecommunications and cybersecurity will be critical as businesses in other sectors look to leverage the benefits from an agile workplace and remote operations that have manifested so clearly since the outbreak of COVID-19.  

Australia has been among the most successful of nations across the globe in its control of the COVID-19 health curve. Its next challenge is to bring the same leadership to ensure the economic curve achieves a rapid and sustainable upwards trajectory. Free capital – and embracing the at-times uncomfortable story of the death of unviable companies – is critical to ensure that outcome and secure Australia’s long term economic growth.  

This narrative will be critical as we transition to a post-crisis operating environment that has forever changed the business environment globally and domestically.   



Contacts

Deputy Chair, Australia; Head of Risk Advisory, Australia; Partner
Co-Head of Sydney; Partner
Senior Advisor, Risk Advisory
Senior Advisor, Risk Advisory
Senior Advisor, Risk Advisory
Senior Advisor - Risk Advisory
Senior Advisor - Risk Advisory & Corporate Finance

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