A group of insolvency industry participants has urged the government not to extend the current relaxation of the insolvency rules beyond this month, arguing that the COVID-19 relief measure is causing a domino effect of failing businesses.
A paper issued by the Australian Restructuring, Insolvency & Turnaround Association, the Australian Institute of Credit Management and commercial credit bureau CreditorWatch says: “Too many businesses are not paying their bills. Companies that should be in liquidation are continuing to trade and are threatening the livelihood of otherwise solvent businesses.”
In March, the Treasurer introduced a number of temporary measures to run for six months.
The minimum threshold for creditors issuing a statutory demand on a company under the Corporations Act rose from A$2000 to $20,000.
The timeframe for a company to respond to a statutory demand was extended from 21 days to six months.
Directors were temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of a company’s business.
The threshold for the minimum amount of debt required for a creditor to initiate proceedings against a debtor increased from $5000 to $20,000.
And the time a debtor has to respond to a bankruptcy notice was increased from 21 days to six months.
The industry paper says: “The government’s measures were well intentioned but they have produced serious unintended consequences.”
The chief executive of Australian Restructuring, Insolvency & Turnaround Association, John Winter, said: “Insolvent businesses are running even higher debts, costing creditors even more money. When they are eventually and necessarily wound up, there will be less than nothing left for creditors, likely putting those creditors at risk of collapse.”
The group wants the government to encourage companies that know they are at risk of insolvency to start talking to their creditors and insolvency professionals to work out a plan.
Otherwise, “there will almost certainly be a deluge of insolvencies when the moratorium ends, prompting a catastrophic decline in business confidence and derailing any opportunity for near-term recovery.”
According to commercial credit bureau CreditorWatch, payment times rose sharply in June and July.
At the same time business defaults and insolvencies have been falling. “It’s extremely unlikely this is a true picture and these figures would be vastly higher if not for the temporary insolvency measures.”
CreditorWatch data “indicates the number of companies that became insolvent has halved this year,” the paper explains.
“This time last year, 4000 businesses had become insolvent. The figure for 2020 is 2,000 insolvencies. This drop can be directly attributed to the temporary moratorium on insolvent trading rules.
“This means our members are trading with insolvent businesses. They are extending credit and being forced to support businesses that are insolvent.”
All three organisations contributing to the paper say discussion with their members and clients indicates that there is very little appetite for the temporary measures to remain in place.