Sounds dramatic, but this is frightening and it’s real. How will you know that your next business customer is not one of them? Or one of your old customers has just joined the ranks of the Zombies?
We are seeing the dangers everywhere.
The definition of a ‘Zombie’ business is one which in the absence of Covid-19, would otherwise have become insolvent. Insolvency may have resulted in the company being placed into Administration, Receivership or Liquidation, or if individuals, into Bankruptcy.
Further, in the event that the directors of that company have been trading whilst knowing that they could not meet the company’s debts as and when they fall due, those directors could also fall foul of the insolvent trading laws. That may expose them to criminal prosecution and civil damages (yes, who would willingly become a company director if you had the choice?).
However, in order to protect those businesses experiencing financial stress resulting from the C-19 induced economic downturn, the Federal Government has provided a range of extensions of time to respond to creditor demands (up from 2 weeks to now 6 months), higher thresholds of default and amazingly, suspension of personal liability for insolvent trading. No wonder insolvent businesses continue to trade without consequence, building ever larger debts.
It’s like being in the wild 1960’s. Back then, corporate cowboys could get away with all kinds of behaviour and innocent businesses and consumers were often their sad victims.
But now, that period of temporary relief has been further extended out to 31 December.
Not only have these Zombies been re-invigorated, but they have been joined by a new army of previously healthy businesses that simply cannot survive. They too have become a walking time bomb ready to collapse and take their victims down with them.
Why the alarm? Mostly because you don’t always know they are out there. Businesses are trading with them, extending credit, arranging supply, doing contracts, relying on them, whilst being unaware that their non-performance and ultimate collapse may have a devastating blow to your own business.
But they are definitely there. They are not always obvious. They are not covered in blood with their faces half missing, like in Hollywood. So how can you spot them?
Firstly, think about what business they do. Not just with you. Have their (traditional) markets and customers suddenly disappeared? Were they (or their customers) in hospitality, entertainment, food and beverage or accommodation and travel, or an industry which supplies to these sectors (such as airline food)? You may have faced a 20% downturn, but do they face a 60% downturn? Is that ever survivable?
Secondly, you can do your own due diligence. You can purchase a credit check (Dunn & Bradstreet, Illion) which will provide a level of comfort regarding the behaviour of potential business associates. You can ask around as to colleagues who may know these businesses. You can ask for references from their existing suppliers and of course, you can even seek protection for goods or services supplied (Romalpa clauses, debtor insurance and director guarantees).
But perhaps the best protection is your own careful judgement. Interview your business associates carefully and cautiously. Try to form your own view as to how they are travelling. Maintain communication and watch for changes.
Perhaps the old saying may be very apt “keep your friends close and your enemies closer”. Because Zombies could be that invisible enemy.
Taxation Services Director.