10,000 Companies Facing Post-Pandemic Insolvency

Australia will be overwhelmed with insolvencies by the end of 2022 due to a pandemic hangover, according to accountancy giant Grant Thornton.

Thousands of COVID zombie companies, alongside many others with extreme debts, will be forced to wind-up in the coming months.

Zombie companies are those unable to cover debt servicing costs from current profits over a prolonged period.

50,000 warning letters have been sent to company directors by the ATO, with up to half facing instant insolvency.


What Happened?


Insolvency numbers halved during the peak of the pandemic, with many companies relying on covid support provisions such as JobKeeper.

Many of the companies with issues were already on some sort of payment plan with the ATO before the pandemic, and many more came to light after applying for support measures (particularly those that required lodgement with the ATO).

Now, many of these directors have been given notice by the ATO to act immediately or face the consequences.

“We’ve now got 50,000 notices that have been issued as a pre-warning that if you don’t do something, the next letter you’ll get from the ATO is more threatening,” explained Financial advisory partner John McInerney.

Directors have been warned that unless their company handles its affairs, then they face a Director Penalty Notice (DPN), which may be a lockdown or non-lockdown DPN.

If you receive a lockdown DPN, the only way to remove it is to pay the debt.

If you receive a non-lockdown DPN, you can either pay the debt or put the company into liquidation to avoid personal liability.

Read more about the types of DPNs and what you can do to resolve them here.


Options & Alternatives


Other options include appointing a small-business restructuring (SBR) practitioner or voluntary administration.

SBR was introduced to help businesses come to a formal compromise with creditors while allowing directors to remain in control.

Mr McInerney also suggested that many accountants are not yet aware of SBR’s benefits, while not many companies have been through the process yet.

“Advisers don’t really know the process and they’re still scared of it.”

“They say, ‘this is great’ but there’s a reluctance to do anything,”

“The ATO is taking a commercial approach here to support businesses that have gotten into strife post-pandemic.”

It would help the ATO regain almost half of the small/medium-sized enterprise tax debt, roughly $20 billion, making it look like a good creditor while also encouraging companies to engage with the office.

Companies with the ability to survive SBR should consider it a good solution.

Insolvency is only months away for the others as the ATO attempts to work with its debtors.

An SBR is also a good result for the ATO with it accepting deals at 5¢ – 10¢ on the dollar, rather than the usual nothing – a surprisingly good return.

It also costs the ATO up to $30,000 in legal fees to take a company to court.

Less than 1% of liquidations resulted in the debt being repaid at 51c on the dollar or more, and more than 90% ended with no repayment to the ATO at all.


Contact Us


For more information, contact us at Bambrick Legal today. We provide a free 15-minute consultation for all new enquiries.

Read more about our Insolvency Law services here.

Related Blog – Force Majeure Provisions & Insolvency

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