Zombies leading global insolvency march

In 2020, there was plenty of discussion about the looming global insolvency time bomb as a result of the pandemic, with trade credit insurer Euler Hermes predicting a 35-per cent cumulative jump in the number of companies going best between 2019 and 2021. However, with governments around the world scrambling to save companies battered by the pandemic and rolling out major support measures, those figures have been readjusted in many parts of the world.

Australia looks set to have been spared the much-discussed business insolvency ‘tsunami’ thanks to the federal government’s temporary support measures – but locally, and around the world, zombie companies are on their way out as the measures come to an end. In its report 2021-2022: Vaccine Economics, Euler Hermes states: “The broad-based extension of ‘temporary’ support measures into 2021 is likely to keep insolvencies artificially lower for longer but their phasing out should start an increase in insolvencies as early as H2 2021.

“The phasing out of support measures remains critical and uncertain. Any new extension in terms of timing or magnitude would lead to a modified outlook, with less insolvencies in the short term but more insolvencies in the long term due to the increased ‘zombification’ of companies, notably in the sectors most impacted by the crisis.”

According to Euler Hermes’ Global Insolvency Index, Australia’s insolvencies are predicted to be 10 per cent higher in 2021 and 10 per cent higher in 2022 compared to 2019. That compares to a 41 per cent decrease in 2020. New Zealand is also predicted to see a 10 per cent increase in 2021 and 2022 after experiencing an 11 per cent decrease in insolvencies in 2019 and 16 per cent decrease in 2020. The Index also predicts that the Asia-Pacific region will outperform other regions of the world, with a 4 per cent increase in insolvencies in 2021 and 18 per cent next year compared to 2019.

Bradd Morelli, Jirsch Sutherland’s National Managing Partner, said the once-predicted global insolvency time bomb has been defused by massive government support measures around the world and the vaccine roll out, which is predicted to “supercharge global growth”.

Bradd Morelli, National Managing Partner, Jirsch Sutherland
Bradd Morelli, National Managing Partner, Jirsch Sutherland

“In Australia, government support has cushioned the fall and put the country in a strong position compared with many other regions. But it doesn’t mean there won’t be companies winding up,” Morelli says. “The phasing out of the stimulus measures is expected to start an increase in insolvencies from the second half of this year. And the zombies will be leading the charge – particularly pre-COVID zombies, i.e., companies that weren’t viable before the crisis but were kept afloat by the emergency measures, and COVID-19 zombies – i.e., companies weakened by the pandemic, notably in the sectors most impacted by the pandemic, such as restaurants, hotels, tourism and travel.

“However, there are also still-viable companies that have been scarred by the 2020 hit on cash flow and profitability. The scars will take time to heal but with the right help and solutions they can turn their businesses around and prepare for the future. Now’s the time for fragile but viable businesses to focus on ways to remain solvent.”

At a global level, insolvencies are expected to rise by 25 per cent in 2021 compared to 2019, with 2022 expected to show a 13 per cent increase compared to the same period. The most severely affected regions will be North America, where insolvencies are predicted to be up 57 per cent by the end of 2022 compared to 2019, while Latin America will be 31 per cent higher. Western Europe insolvencies are expected to be up 23 per cent, while the number of insolvencies in Asia will be 18 per cent higher.

Insights from around the country

Around Australia, Jirsch Sutherland Partners have reported an uptick in enquiries across a range of sectors. “There’s a definite change in communication from ‘We’ll wait and see’ to ‘We need to act’,” says Andrew Spring, Partner. “The common theme is around deferred liabilities, particularly tax liabilities, and the requirement to pay.”

WA Partner Jimmy Trpcevski says: “There’s a lot of legacy ATO debt that will raise its head once the ATO initiates collection again.

In Queensland, Partner Chris Baskerville agrees, saying the ATO is still not winding up companies yet. “It remains the sleeping giant,” he says. “There’s definitely been an uptick in enquiries since January, and particularly in the past few weeks. May will be a real ‘tell’ as to what lies ahead.”

Victorian Partners Glenn Crisp and Malcolm Howell also believe an increase in insolvencies will come in late May / June. “Following the extended lockdown in Melbourne, there are more people about and back in their offices, and more discussions about how businesses are faring is taking place,” says Crisp.

Newcastle-based Partner Lloyd Kerr has also noticed a small increase in enquiries, saying: “We are now seeing many people who can see the writing on the wall. However, from what I’m also seeing, there are many who still have their heads in the sand.”

Jirsch Sutherland