An expected tsunami of business insolvencies as a result of COVID-19 has, so far, been little more than a trickle. In Australia and New Zealand, government financial support and an uncharacteristic display of generosity towards debtors has enabled many hard-hit businesses to survive, for now at least.

Insolvency statistics from the Australian Securities and Investments Commission (ASIC) reveal that reported insolvency events are down from 2910 for the June 2019 quarter to 1760 for the equivalent period in 2021. Court windings-up dropped from 744 to 288 for the same periods.

Insolvency practitioners McDonald Vague in New Zealand report the first quarter of 2020 saw corporate insolvency rates decrease by 8% when compared to 2019. The second quarter of 2020 saw corporate insolvencies decrease by 23% compared to the same period in 2019. That insolvency slowdown has continued in 2021. Average monthly corporate appointments have fallen by close to 20% in New Zealand, from 163 each month in 2019 to an average of 131 a month in 2021.

That slowdown has continued in 2021. Monthly corporate appointments have fallen by close to 20% in New Zealand, from an average 163 each month in 2019 to 131 a month this year.

Keaton Pronk CA, senior associate at McDonald Vague in Auckland, says insolvency appointments have “dropped off a cliff” since the first lockdowns in 2020. Government subsidies have “propped up businesses that maybe shouldn’t have had those funds in the normal course of events.”

Government subsidy programs such as Australia’s JobKeeper and the Wage Subsidy in New Zealand have meant that, on the whole, business bank accounts are unexpectedly flush, despite lockdowns.

“That means there’s been a level of insulation which has been afforded to businesses,” says John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association (ARITA).

“We were proponents of the view around the middle of last year that we were going to see an insolvency tsunami. It just hasn’t happened because of the extent of stimulus packages.”

He adds that “forbearance” for debtors from the Australian Taxation Office (ATO), landlords and big lenders has been critical.

Andrew Barnden FCA, director at insolvency firm Rodgers Reidy and chair of CA ANZ’s Insolvency Management Committee, confirms the ATO has not been enforcing debt recovery, while offering payment terms of up to five years in some cases. “That’s unheard of, and it will change at some time,” he says.

Commercial disputes skyrocket

The flip side to fewer insolvency cases is an increase in commercial dispute resolutions says Melbourne-based Samantha Kinsey, a partner at King & Wood Mallesons who specialises in restructuring and insolvency law.

“Commercial litigation work in every jurisdiction is on the rise. New commercial proceedings have gone through the roof, particularly shareholder oppression actions,” she says. “Maybe that’s the other side of these tensions around creditors not getting paid.”

Kinsey expects insolvency activity to pick up in 2022, but adds that the threat of a tsunami of cases has likely passed because of the available liquidity and the continuing cooperative approach of the ATO. “If you put everyone out of business during a pandemic it’s not really good for business at the tax office either.”

“If you put everyone out of business during a pandemic it’s not really good for business at the tax office either.”

Other factors at play

Another factor at play in Australia is the upcoming federal election, which must be held before the end of May 2022. Winter does not think the ATO’s bighearted stance will change until after the polls. “[And] when the ATO does start to move, there’s at least a three to six-month delay before you’ll start to see them winding up businesses.”

Nor does he expect major lenders to call in their debts until at least the second quarter of 2022. “Until then, insolvency practices are going to be very quiet,” he says.

Another reason for business being slow may be the goodwill that exists among so many commercial creditors, suppliers, landlords and financiers.

“No doubt they want to help small business, but there are definitely also brand reputational concerns,” says Jonathon Colbran FCA, a restructuring and recovery partner at RSM Australia.

“Nobody wants to be the enterprise that’s seen to be jumping the gun and kicking small businesses when they need support.”

“Nobody wants to be the enterprise that’s seen to be jumping the gun and kicking small businesses when they need support.”

Karen McWilliams FCA, CA ANZ’s business reform leader, says although governments in Australia and New Zealand have focused on keeping businesses going, inevitably there will be pressure for the ATO and Inland Revenue to collect outstanding debts.

“The tax office is owed a lot of money and we have to remember that this is public money. That’s what balances the budget and pays for all the services.”

Picture: Karen McWilliams FCA.

Wait-and-see approach

In New Zealand, predictions that so-called ‘zombie’ companies would collapse and spark a rush of insolvency appointments once government support was stopped haven’t been realised.

Pronk suspects that in some instances companies have shut down without going through a formal insolvency process. “They’ve gone direct to a closing down auction, or they’ve dealt with the asset themselves,” he says.

He still expects many businesses to opt for insolvency when the financial heat becomes too great; alternatively, they could face court action if creditors become impatient. Amid the continuing economic uncertainty, McWilliams advises embattled business owners to seek assistance from their accountant or an insolvency practitioner.

“If businesses think they may be in strife, get help early and talk to a specialist,” she urges. “And for those that cannot survive, it is important to help them close gracefully.”

It is counsel that Rodgers Reidy’s Barnden backs unreservedly. At a time when he expected to be flat out with insolvency cases, he laments that few struggling businesses are reaching out for assistance. He urges accountants to be proactive and identify early warning signs when preparing their clients’ financial and business statements.

“Deal with the problem early, before the hole gets too big, otherwise clients won’t be able to climb out of the financial trouble they’re in,” he says.

“Deal with the problem early, before the hole gets too big, otherwise their clients won’t be able to climb out of the financial trouble they’re in.”

While he and other restructuring experts would like to be busier, Barnden hopes “fire sales” of distressed entities can be avoided. “If it’s a tsunami of insolvency appointments, the prices for assets – second-hand plant and equipment and motor vehicles – could also fall.”

For businesses with the courage to restructure, Colbran says bringing a fresh set of eyes into the business can highlight pressure points and risks. Then owners and directors can weigh up their options. They may want to refinance expensive debt or access extra resources to create a war chest of working capital. They may want to do debt-toequity swaps with investors or restructure through a deed of company arrangement.

Safe harbour review

In late August 2021, Australia’s Treasury launched a review of the insolvent trading ‘safe harbour’ legislation, introduced in 2017, to assess if it is still fit for purpose. The laws are designed to protect company directors from personal liability in a case of insolvent trading if a company is genuinely attempting to restructure.

ARITA continues to support the safe harbour provisions, noting they are being used with some success by directors of large companies. But Winter says the laws were never meant to be a tool for small businesses and that they understandably fly under the radar.

“It’s meant to be carried out behind closed doors to help get a business through a crisis,” he says.

In a submission to Treasury, CA ANZ has stated that the provisions are sound and best suited for directors of medium to large businesses, and that the new small business restructuring regime, introduced in January 2021, is a better means for directors of small businesses to rescue a viable business. 

In the event of turnaround action, CA ANZ recommends a mandatory requirement for businesses to obtain independent advice, arguing that it will provide a degree of confidence to stakeholders that a turnaround action is likely to lead to a better outcome than immediate administration or liquidation.

Uncertain year ahead

All eyes will be on the economy in the lead-up to Christmas as businesses pray for better trading conditions. Tourism operators, cafes and restaurants are still vulnerable, says Barnden.

“A lot of them have personal guarantees on leases, which is of concern and may cloud their judgment.”

But Kinsey considers the real test for businesses in 2022 will be working out what to do about the accumulated tax debts, rent and finance debts that have not been paid during the pandemic.

“That’s going to be the big challenge for many businesses on the other side of the pandemic,” she says. “There are various restructuring options available and I hope businesses seek advice and assess those options to put themselves on the best possible footing to be successful post-COVID-19.”

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Call for more reforms

Despite recent government initiatives to help finetune Australia’s insolvency laws, some experts believe the time for a root-and-branch review has arrived.

King & Wood Mallesons partner Samantha Kinsey welcomes an examination of safe harbour legislation and moves to clarify the treatment of trusts under insolvency law. However, she fears that “ad hoc” changes such as the proposed reforms to schemes of arrangement could misfire if not considered in the broader context of Australia’s restructuring landscape.

Kinsey advocates a big-picture discussion about what sort of an insolvency and restructuring system Australia wants once COVID-19 has settled down “rather than just cherry-picking rules from overseas jurisdictions”. She notes that the Harmer report, the last comprehensive review of Australia’s insolvency laws, was delivered more than three decades ago in 1988. At the same time, there is a widening gap between the financial solutions required for the big end of town and small businesses.

John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association (ARITA), points out that Australia has shifted from a bricks-and-mortar business environment to an economy with many online businesses.

“Our insolvency laws are not set up for those businesses,” he says. “We have the most complex insolvency regime in the world and, frankly, it is too complex for most lawyers or accountants in public practice to comprehend, let alone people operating small businesses. That makes it dysfunctional and onerously expensive.”

Jonathon Colbran FCA, a partner at RSM Australia, adds that the market has not yet embraced the new small business restructuring regime which started this year. He fears it may put too much pressure on directors and limit the impact of specialist administrators. “So you don’t get the true value that we bring to the table.”

Nevertheless, Karen McWilliams FCA, business reform leader at CA ANZ, believes progress has been made as a result of legislation introduced in 2016 and more recent reforms, including the small business restructuring initiative.

“No legislation when it first comes through is going to be perfect and it will take some time for it to bed down. But I think it does start that process of reform.”

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