Litigation & Dispute Resolution 19 October 2021

Surge in insolvencies expected following extended lockdown

In its latest Financial Stability Review, the Reserve Bank of Australia has forecast that a number of businesses operating in industries which have been affected by the pandemic or in locations which have experienced extended lockdowns will struggle to survive long-term.

Despite widespread predictions when COVID-19 first hit Australia in 2020 that there would be a significant impact on the economy and, in turn, a wave of insolvencies, the considerable policy support provided by the Government (including the rent relief and JobKeeper initiatives, the moratorium on insolvent trading, increases to the minimum amount necessary to serve a statutory demand on a company and increases to the time for compliance with a statutory demand) saw a noteworthy decline in insolvencies over the last two years as businesses were provided liquidity and time to restructure or wind down without insolvency.

Overall business profits increased in the first half of 2021 due to these improved trading conditions and the tightening of invoicing practices by many businesses which meant that they were able to cover higher labour expenses when the JobKeeper subsidy ended in March and were generally in a strong financial position with healthy cash buffers leading into the recent spread of the Delta variant and the associated lockdowns.

Indeed, the RBA’s review found that across nearly all industries, “aggregate revenue had recovered to be around or above its pre-COVID-19 level in the first half of this year.”

However, despite the strong financial position many businesses currently find themselves in, the RBA has predicted that “not all businesses will recover and insolvencies will rise, although this will be from a low level” noting that increases in insolvencies “…are likely over a longer period as vulnerable businesses exhaust their cash buffers.”

The RBA’s review has highlighted how the pandemic (and the extended lockdowns) has had an uneven financial effect on businesses across a number of industries.  For example, whilst the hospitality, arts, recreation and tourism industries have been hit hard by the pandemic, many retail, transport and construction businesses have reported record profits.

For those businesses in industries which have been significantly impacted by the pandemic and the associated extended lockdowns, it appears that the Government’s policy support may have the effect of merely delaying the inevitable with the RBA predicting that business insolvencies are set to rise in 2022 when the ATO and banks start enforcing debt and the previously healthy “cash buffers” held by some businesses run out.  This is particularly so if their trading conditions do not improve when restrictions are eased and the Government support measures are no longer in place.

For those companies that do ultimately become insolvent, insolvency policies for incorporated small businesses introduced at the beginning of the year (including a new debt-restructuring process and simplified liquidation procedures) can provide some assistance to improve outcomes for businesses and their creditors.

The key takeaway for those with businesses who are struggling financially is to seek professional assistance at an early stage when the chances of survival by way of restructuring and turnaround are vastly increased.

Charlie Clark.
Charlie Clark Senior Associate Litigation & Dispute Resolution View profile
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