5,000 companies could become insolvent in the months ahead
At least 5,000 businesses are likely to become insolvent in the next quarter as the market plays catch up after the end of the JobKeeper wage subsidy and the normal rules around trading while insolvent are reinstated.
According to figures published by the Australian Securities and Investments Commission, each year roughly 8,000 businesses are placed into external administration. But in 2020, only 5,000 businesses entered administration, which means 3,000 businesses that should have become insolvent last year are due to fail this year.
An additional cohort of businesses is likely to enter administration as a result of the pandemic, which could prompt an additional 2,000 businesses to fail this quarter. This brings the total number of companies that are likely to become insolvent to 5,000 in the second quarter of the year.
The fall in 2020 insolvency figures seems counterintuitive given the tough trading conditions as a result of the pandemic. But, the temporary moratorium on insolvent trading the federal government introduced in 2020, as well as the JobKeeper provision, artificially supported some businesses to continue trading that would have otherwise failed – so-called ‘zombie companies’.
CreditorWatch, in conjunction with McGrathNicol, will today launch a new whitepaper, The future of insolvencies: tsunami, torrent or trickle? that explores insolvency trends, options for businesses working through debts and potential sources of funding post 31 March.
“While insolvency numbers have risen in 2021, it’s the increase we needed to see. We need to get back to at least pre-COVID administration levels and away from the synthetic environment we’ve lived in for the past 12 months,” said CreditorWatch CEO Patrick Coghlan.
“We’re going to see sustained increases in administration numbers until they reach normal levels. I’m not expecting the tsunami of insolvencies that was talked about last year, but the fact is, companies need to be allowed to fail; that’s how the economy works. That should be expected and it’s a good thing. It means companies that shouldn’t be operating aren’t pulling down the rest of the economy. It’s also important to remember we are in a much better position than anyone could have anticipated this time last year,” he adds.
According to CreditorWatch’s Business Risk Review for February 2021:
· There was a 61 per cent jump in external administrations in February 2021 versus January 2021.
· There was a 50 per cent decrease in external administrations in February 2021 versus February 2020.
Against this backdrop, it’s essential for businesses to engage their advisers, in particular, their accountant and, if necessary, restructuring experts. This will ensure they have a clear and real-time view of the position of the business and its ability to pay its debts on an ongoing basis, and a better understanding of customers’ capacity to pay.
“Are your suppliers still financially viable? What are the risks in your supply chain? Look downstream at your customers and assess their solvency,” recommended McGrath Nicol insolvency expert Kathy Souzou.
She expects a rise in company-led restructuring through 2021 and notes conditions in the corporate landscape support this. “There’s capital available for the right businesses and stakeholders such as the federal government, the Australian Taxation Office and the banks are much more willing to support restructuring solutions than they may have been in the past.”
But, says McGrathNicol chair Jason Preston, over the course of the year, the ATO and banks are likely to become a little fronter footed compared to 2020. He notes structural changes in the economy, for instance, the shift away from fossil fuels to renewable energy sources, could also affect insolvency trends, given coal-fired power producers are finding it increasingly difficult to access capital.
“Loan-to-own transactions are a growing trend in restructuring, where the lender takes control of the business using the insolvency process to restart the business and implement a new business model. I think we’ll see more businesses use the restructuring and insolvency process to reshape and resize their operations,” he said.
Businesses in this position are advised to work closely with their accountant and restructuring advisers to manage this situation. That’s the best and only way to work through what is a stressful and tough situation and find a path forward for the future.