The March of the Zombie Companies

Yesterday the Federal Government announced that the relief for directors from liability from insolvent trading would be extended, it had been due to expire at the end of September.  The relief will now last until the end of the year, it gives corporations greater comfort and more time to manage the fall out of the COVID-19 pandemic without the pressure to wind up their company.

Directors may see press about this and think this is a ‘get out of jail free pass’, but it is not.  Assessing the ongoing financial liability of your organisation, as well as the impact of incurring further debts is something Directors should be thinking seriously about.  But this will allow many viable organisations to come out the other side of this unprecedented disruption.

Despite these measures or perhaps because of them, I am afraid.  As you may know, I am former insolvency, bankruptcy and litigation lawyer – who now prefers to protect my clients as far as I possibly can by putting agreements in place, in writing. 

My fear is that Australia, now formally in recession has an army of zombie companies that are out there doing business with other businesses.  A zombie company is one that should have been wound up in insolvency but hasn’t – other businesses are unknowingly contracting with the zombies who are being kept afloat by measures that are designed to protect the Australian economy from the coronavirus pandemic.

So, how can you and your perfectly solvent business avoid getting caught up in this zombie march?  As always, different organisations will be open to taking different levels of risk.  If you have only a few clients/ customers or patients and rely on them very heavily to be paid, you might be in a higher risk category that an organisation with lots of small customers – what would happen if you extended terms and kept extending terms and then one of them could not pay you?  Check your accounts receivable days, keep in constant communication with those who owe you money and check when you might stop supply of your goods and/ or services if you are not getting paid.  Trust me, NOW is the time to start having some uncomfortable conversations about your payment terms.

Now is also the time to be seriously considering other ways you can protect your business from the zombies – they may well be doing business for at least the next three months.  A bigger commitment could be preparing a security matrix (on your own or with an advisor), which sets out all the different ways you can protect your business to the maximum extent possible (within what is acceptable risk-taking for you) with the aim of keeping your business alive.

This is important and one of the reasons I am so passionate about it is that we have seen companies who have one major client, that client gets behind with their receivables, the company keeps giving them more time to pay and then the client goes into liquidation – pulling the company down with it, if your major client or customer is a zombie or marches off a cliff or follows a zombie off a cliff you do not want to follow them.

If you think a security matrix could be useful, here are some things to get you thinking:

Before starting work

1.       Reviewing your internal customer or client profile;

2.       Credit checks of customers or clients;

3.       Checking trade references for new client or customers;

Payment terms (+)

4.       Negotiating or re-negotiating payment terms (the shorter the better usually);

5.       Executed Agreements (ensuring you have signed terms and conditions);

Security

6.       Negotiating security (in conjunction with payment terms);

7.       Retention of title;

8.       Registering security;

9.       Security over all of the customer or clients real (land) and personal property

10.   Director’s Guarantee supported by security over all their real and personal property

11.   Director’s Guarantee

12.   Retention of Title over any assets which you sell on credit terms or hire out

Each of these items could be an article in themselves, and as always getting professional advice and what is best for your business is highly recommended because, as lawyers always say, what is right for you and your business will depend on your circumstances.

Questions?

If you would like to enquire how we might work together to assist you, connect with us. We look forward to being able to support you to minimise your risk and maximise your potential.