There is a strange disconnect between rapidly falling formal insolvency appointments and the fact that we’re in the first recession for almost 30 years.
Recently released data from the Australian Securities & Investments Commission (ASIC) showed that for the month of October 2020 compared to the same time last year:
- Winding up applications were down by 94%
- Court Liquidations were down by 93%
- Voluntary Administrations were down by 64%
- Voluntary Liquidations were down by 44%
Why have formal insolvency appointments fallen so much?
It’s a combination of things.
Government stimulus – financial support measures in response to the COVID-19 pandemic, such as JobKeeper and the ATO’s Cash Bonuses, have provided additional revenue to businesses – including those that were struggling prior to the onset of COVID-19.
Change to insolvency law – there’s currently a moratorium on personal liability for directors who are trading a business whilst it’s insolvent. The moratorium period commenced on 25 March 2020 and is currently scheduled to conclude on 31 December 2020. Were that moratorium not in place, many company directors would likely have taken the proactive step to place their companies into either Liquidation or Voluntary Administration, rather than risk personal liability and loss of personal assets.
ATO not chasing debt – the Australian Taxation Office (ATO) has historically been the largest petitioning creditor (by number), as it seeks to recover tax debt from delinquent debtors. Currently the ATO isn’t making any winding up applications and is instead focussing its limited resources on other COVID-related projects. As a consequence of this change in approach to collecting outstanding taxes, ATO debt now exceeds $53 billion and is rising.
Harder to wind up debtors who don’t pay – before the COVID-19 pandemic, creditors could issue debtors with a statutory demand for unpaid debts of $2,000 or more. If those debts remained unpaid after 21 days, the creditor could then apply to the Court to have the debtor wound up. These limits have been significantly extended. They now apply only to debts of $20,000 or more (instead of $2,000) and debtors now have six months to respond to the demand (instead of 21 days). The increases are a temporary measure and are due to end on 31 December 2020. As a result, many creditors are waiting until it’s business as usual before issuing demands and winding up applications. What is not known is whether the Government will immediately revert to the original limits or whether there will be a graduated return to ‘normal’
Landlords are unable to evict tenants who don’t pay – currently landlords are unable to evict tenants that don’t pay their rent, where it can be demonstrated that the tenant has suffered a fall in revenue due to the COVID-19 pandemic. An example would be restaurants, pubs and gyms that were all forced to close or operate at reduced capacity. Unpaid rent for those types of business is still accruing and unless landlords are willing to forgive the amounts due, the “deferred” rent will nonetheless remain payable.
Top tier financiers are not enforcing – for a number of years there has ben a decreasing trend in banks enforcing their securities (i.e. appointing receivers) when the borrowers are in default. This reluctance has increased following the Hayne Royal Commission practice has seen the value of impaired loans reported by the banks is building up an alarming rate.
Combining only a few of the above factors, directors who operate businesses that are ‘doomed to fail’ are likely to be motivated to hold off from taking the proactive step of appointing an external administrator to their struggling company. And why not? They can continue to receive additional income support from the available support measures, whilst enjoying the relative comfort of knowing there is very low risk of their company being forcibly wound up, evicted from their leased trading premises or their personal assets being at risk through insolvent trading.
What does the future hold?
The current status quo cannot continue.
We know that JobKeeper will step down again at the end of the year and again on 31 March 2021. But what else is likely to change?
Looking into my crystal ball, I predict the following:
- Once lockdown/restrictions and state borders are open again end the government will step down from its general stimulus measures and focus on infrastructure spending. In other words, there’ll be no more cash handouts.
- The moratorium on insolvent trading will come to an end (although it might be extended for a short time to avoid a “wave of insolvencies” around Christmas) and directors of companies that are effectively insolvent now will seek to appoint a Liquidator (if the business has no prospect of recovery) or a Voluntary Administrator (if there is a fundamentally sound business worth saving), or just dig in their heels and wait for the inevitable end.
- Ordinary unsecured creditors (including landlords) will expect payment of unpaid debts. Unless there can be a compromise reached or forgiveness of debts, I foresee a dramatic uptick in statutory demands, winding up applications and subsequently Court Liquidations. Probably towards the end of Q1 2021.
- The banks also won’t be able to hold off on appointing receivers where borrowers have no prospect of repaying or refinancing their facilities. I’ve heard anecdotally that banks are selling off impaired loans quite cheaply at the moment, so it may be that whoever buys the debt makes the receivership appointments rather than the large banks. After all, the banks are still smarting from the banking royal commission and want to avoid any negative publicity wherever possible.
So, while there will be some informal workout arrangements where debtors and creditors agree some sort of compromise that works for all, I do expect numbers of new receivership, liquidations and administrations to rise early in 2021. That’s why we’re clearing the decks now and finalising as many older files as we can while things are relatively quiet.
How we can help
The insolvency practitioners at Vincents are members of ARITA and follow the ARITA Code of Professional Practice.
If you’re running a business of any size and are currently encountering financial difficulties, do not let time and opportunity to engage early pass you by. Take the very first step, by asking questions or seek help. You may find your situation is not nearly as bad as you had imagined. If it is, then early engagement will increase the options you have available to you, regardless of how the solution is eventually deployed. What we do know is that once it’s too late, it’s too late.
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