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Government stimulus creating backlog of SME insolvency cases

Adrian Flores
Adrian Flores
11 August 2020 1 minute readShare
Government stimulus creating backlog of SME insolvency cases

New data showing company wind-ups have all but ceased in the past quarter may be disguising “zombie” businesses being propped up by government stimulus measures through the COVID-19 pandemic, according to a debt recovery firm.

Prushka Fast Debt Recovery revealed through data sourced from court records that the Australian Taxation Office and other government agencies have halted their winding up of businesses.


The data found that in April to June, 374 businesses issued Notices of Winding Up Applications, a decrease of 47 per cent compared to the last quarter, and 64 per cent year-on-year.

Victoria issued the largest number of wind-up applications with 169 reports, or 45 per cent of all applications, followed by New South Wales with 95 reports or 25 per cent of all applications.

Prushka chief executive Roger Mendelson warned that these figures are modest.

“These figures are just the tip of the iceberg and there would be many more companies which are technically insolvent, however may not be commercially viable to wind up,” he said.

“With loosening laws on insolvent trading, I expect a significant number of companies fall into this bucket.”

Mr Mendelson said that while the government’s initiatives to support businesses through the COVID-19 pandemic were helping keep companies afloat, it will cause a backlog of wind-up and bankruptcy cases.

“From April, the government issued several temporary changes to support financially distressed businesses, including extending the time companies have to respond to a statutory demand from 21 days to six months. This has caused an incredible slowdown in the debt collection process,” Mr Mendelson said.

“This backlog of cases could cause major economic dislocation post-COVID in a time where we will need entrepreneurs thriving and small-business owners working towards rebuilding.

“If the government were to extend these measures, Australian SMEs would be restricted from taking action to protect their livelihood, and it could also encourage irresponsible businesses to incur debts they have no hope of paying.”

Mr Mendelson also found from his firm’s own data of its 58,000 small-business client base that SMEs are referring debts much earlier.

“We’ve seen a 64 per cent decrease in the average size of debts for April and May this year compared to last which indicates that Australian SMEs are focusing on cleaning up their smaller outstanding debts to boost cash flow,” he said.

“We’ve also seen a 41 per cent increase in the number of debtors seeking instalment arrangements during the pandemic compared to 2019, suggesting businesses and consumers are preserving cash in every way possible.”

Government stimulus creating backlog of SME insolvency cases
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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