The failure of high-profile construction firm Grocon recently shows just how tough the economic environment is at the moment. If a big business such as this can be placed into voluntary administration, it’s a sign small businesses have to be extra vigilant about who they do business with to ensure they are not trading with an insolvent business.
An added complexity is measures put in place by the federal government at the start of the pandemic to help businesses get through this challenging period. One of which was a moratorium on insolvent trading. Under the moratorium, which ends on 31 December, businesses that were solvent before the pandemic, but became insolvent during it, have been allowed to continue operating without penalty to the directors.
This has slashed the number of companies that have been placed into voluntary administration this year, with data from CreditorWatch showing across Australia, court actions nationwide were down by 4.95 per cent, payment defaults dropped by 24.25 per cent and external administrations fell by 19.29 per cent in the third quarter of 2020 versus the second quarter.
Other measures introduced to help businesses trade through lockdowns and the subsequent economic downturn include:
- An increase to the minimum threshold at which creditors can issue a statutory demand to a company to pay their debts from $2,000 to $20,000.
- The time companies have to respond to a statutory demand has increased from 21 days to six months.
- The threshold at which creditors can start bankruptcy proceedings against a debtor has risen from $5,000 to $20,000.
“Under the moratorium, which ends on 31 December, businesses that were solvent before the pandemic, but became insolvent during it, have been allowed to continue operating without penalty to the directors”
These measures have been important to help businesses that would otherwise be solvent survive the COVID period. But they mask the number of companies that would have been placed into administration for non-COVID-related reasons, colloquially known as ‘zombie’ businesses.
This poses a risk for firms offering terms of trade to zombie businesses. Creditors offering terms to these debtors have little recourse if they have sold their goods and services to zombie businesses, given they can incur debts up to $20,000 before they can start legal proceedings to recover this money and they cannot commence bankruptcy proceedings until debts rise to $20,000.
But there are steps businesses can take to mitigate this risk, says Steadfast broker support manager John Clark.
If you asked your customer for prepayment of the invoice before supplying goods and they are unable to do so, it could be a sign they rely on credit terms to operate their business. Whilst this is not uncommon, it creates a non-payment risk to your business, which then needs to be assesses or other security should be requested”
It’s also critical to do due diligence when offering credit to new customers. You can do this by running credit checks on them through a credit bureau. Also check ASIC’s registers to ensure the business is properly registered and a PPSR search for any secured creditors.
If appropriate, take out trade credit insurance, which provides protection if your customers go out of business and cannot pay their bills. The way this insurance works, policyholders insure a portion of the value of their invoices, for instance 90 per cent. That means even if the customers go out of business, the creditor can receive some of their money back for goods and services sold.
As this demonstrates, there are many opportunities to avoid the risk of doing business with zombie firms. And, in a difficult trading environment, it’s essential to do as much as possible to ensure your bills are paid on time and in full.
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