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 did so, 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 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’s latest white paper, in conjunction with McGrathNicol and LINX Cargo Care Group, explores insolvency trends, options for businesses working through debts and potential sources of funding in the post-JobKeeper economy.
What does the data say?
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
The question is how this trend will play out now insolvency laws have returned to more normal settings.
“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,” says CreditorWatch CEO Patrick Coghlan.
“It means companies that shouldn't be operating are not pulling down the rest of the economy. It’s also important to remember we’re in a much better position than anyone could have anticipated this time last year.”
Where to from here?
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.
For more expert insights and a look at the way forward for Australian businesses, download the full CreditorWatch white paper: The future of insolvencies: tsunami, torrent or trickle?
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