However, the insolvency situation is no longer predicted to be the tsunami that was being discussed last year. While there is likely to be a noticeable uplift in insolvency numbers, these are expected to occur in stages throughout the year, with the ripples starting now and the real waves expected after June and then the back end of the year.
Quick government action proved a lifesaver
There’s no doubt last year surprised many when the number of insolvency appointments actually fell. ASIC’s insolvency statistics for 2020 show national insolvency figures for 2019–20 were 7,362 compared to 8,105 for 2018–19. This fall is likely due to the initiatives the government introduced once the seriousness of the pandemic became known. Quick action was taken at the time, including the launch of the Coronavirus Economic Response Package Omnibus Act No. 22 of 2020 (the act), which contained a number of measures to help businesses in financial stress.
Some of the act’s initiatives included a temporary increase in the minimum amount of debt required to be owed (from $5,000 to $20,000) before a creditor could initiate involuntary bankruptcy proceedings against a debtor. The time period for debtors to respond to a bankruptcy notice was also extended from 21 days to six months while the time frame in which a debtor was protected from enforcement action by a creditor following a declaration of intention to present a debtor’s petition was increased from 21 days to six months.
JobKeeper was another, but the vital cash flow it provided is now coming to an end within days, and with it, the number of insolvencies is expected to rise as businesses find themselves no longer able to cover operational costs. And while some vulnerable businesses might currently have cash in the bank, post-stimulus this cash may begin to gradually deplete, particularly as businesses are required to meet deferred payments — e.g. tax, rent — and their own payroll. It’s also vital they continue to meet their superannuation requirements.
Where Australia sits on the global insolvency index
Regardless of the withdrawal of the initiatives, Australia’s outlook appears promising, having bounced back remarkably well from the pandemic. It recorded 3.1 per cent growth in the December quarter, which followed a strong September quarter. But despite its strong showing, a rise in insolvencies is still expected for 2021, as it is for the rest of the world.
In fact, trade credit insurance specialist Euler Hermes is expecting headwinds, even while the vaccine rollout is supercharging global growth. Its report 2021–2022: Vaccine Economics found that as policy support is gradually phased out, a delayed wave of insolvencies is expected to significantly increase to 25 per cent year-on-year in 2021 and 13 per cent in 2022.
Just as Australia recorded a fall in insolvencies in 2020, Euler Hermes’ Global Insolvency Index found the same for the rest of the world.
“Along with the lockdowns of courts, the paradoxical drop in insolvencies comes from massive support measures implemented and then extended by governments to provide liquidity, extra time and flexibility to companies before they resort to filing for bankruptcy,” its report states.
“The broad-based extension of ‘temporary’ support measures into 2021 is likely to keep insolvencies artificially lower for longer, but their phasing out should start an increase in insolvencies as early as H2 2021.” This will be mainly comprised of pre-COVID-19 zombie companies and COVID-19 zombies.
Meanwhile, Euler Hermes’ index predicts Australia’s insolvencies will be 10 per cent higher in 2021 compared to 2019, and 10 per cent higher in 2022 compared to 2019. It also believes that the Asia-Pacific overall is likely to continue outperforming other regions of the world in 2021, but that masks disparities across countries.
But wait… there’s more government reforms
To help businesses that may have trouble coping following the withdrawal of its COVID-19 incentives, the government has introduced new reforms — specifically the small business restructuring reforms — to give financially challenged SMEs with debts under $1 million the ability to restructure their debts while the directors remain in control.
These reforms come with pros and cons. They do encourage early intervention, which is something Jirsch Sutherland is a strong proponent of. And the reforms require that all statutory taxation reporting is required to be completed and employee entitlements paid before a small business restructuring (SBR) plan can be presented to creditors.
But there is a lack of transparency around them that is most evident with regard to the role of the SBR practitioner. Specifically, the practitioner isn’t required to provide a report to creditors that sets out a recommendation for them. Creditors will only see the assets and liabilities to be included in the SBR plan — and not necessarily the full financial position.
In my view, by providing more framework options for SMEs that find themselves in financially challenging situations, the debtor, creditor and practitioner will be pulled together in a mutual desire to sort out the mess, rather than leave it to any further legislative intervention.
I feel it is likely to be the actions of the stakeholders and an effective undertaking of the most relevant insolvency procedure that produces positive outcomes for all parties. Therefore, perhaps it makes more sense to stick with the tried and true traditional insolvency solutions rather than go down the path of the small business restructuring reforms.
Time to check in with clients
Meanwhile, with JobKeeper coming to an end, businesses will likely be reassessing their financial position, if they haven’t already done so. It’s an important time to be touching base with clients to see if they’re prepared for the withdrawal of government support and whether they need assistance to help plan for 2021.
Of particular importance is the need for SMEs to plan for what will happen once the safety net of JobKeeper ends. Ensuring their costs are able to be met along with an understanding of where their revenue growth will come from is critical. Many businesses may have uncovered new opportunities during COVID-19 that have helped them reduce ongoing costs, and now is a good time to reassess whether these opportunities can become a permanent part of the business.
Glenn Crisp, managing partner VIC, Jirsch Sutherland