The Australian Economy Post JobKeeper

On January 1st 2021, the Covid-19 safe harbour rules surrounding insolvency expired – they were rushed in during the start of the pandemic during March 2020 to help business navigate these challenging times. These Covid measures were implemented to prevent an insolvency nightmare for businesses nationwide, protecting many healthy businesses from struggling with the economic downturn.

The changes involved extending creditors statutory demand notices from 21 days to six months as well as increasing the threshold at which creditors could issue a statutory demand from $2,000 to $20,000. Coupled with the Job keeper subsidy scheme (expiring at the end of March) this meant that businesses could stave off the economic noose of Covid lockdowns and ensure that they could retain their much-needed staff.

The New Insolvency Measures

These temporary changes have now expired, meaning that the pre-existing $2,000 and 21 days statutory demands are back in place. However, there was one significant change to the insolvency laws beginning January 1st, 2021. The government adjusted insolvency laws from a “creditor in possession” model to that of a “debtor in possession” for businesses with liabilities of less than $1 million*. The goal of this change is to allow struggling businesses the opportunity to restructure their existing business debts, which can be conducted by the Director rather than an external administrator. This draws inspirations from features in the USA’s Chapter 11 regulations, which is centred around the notion of reviving companies rather than liquidating.

Why ‘Debtor in Possession’

The “debtor in possession” model can help small business by giving them greater control to manage insolvency risks. The potentially high costs associated with using external administrators prevented many small businesses from engaging in it, restricting their ability to restructure, adapt and rebound. Now businesses can take the insolvency process into their own hands to create opportunities that appease creditors and themselves.  

The Post-JobKeeper Impact on Australian SMES

Despite growing economic optimism, there is a looming date of March/April this year which will likely see a sharp incline in insolvencies. The term ‘zombie firms’ has been increasingly popular over the past six months, where many businesses have been on life support from Job keeper and the Covid-19 safe harbour measures. Many businesses that would be trading insolvent in other circumstances have been propped up by the unprecedented government support, thus the concern for March and April of 2021.

ASIC Involuntary Administration Statistics

The graph below highlights this point in an extremely alarming manner, where there have been significant decreases in insolvencies for the 2020 year.

Graph Source: ASIC, Involuntary Statistics

Without the government support in 2020, the orange (2020) bar would likely tower about the previous years. It seems almost inevitable that March and April will be catastrophic months for many business owners and employees unless there is a longer, tapered approach to reducing the stimulus packages.

This will come to no surprise as the Reserve Bank Governor Phillip Lowe has already proclaimed “There will be bankruptcies. There will be some businesses that will not recover. That’s the harsh reality of an economic downturn that’s the worst in 100 years.”*.  

The impending challenges present opportunities for better management of business cashflow in new and more sustainable ways.

#SMES #Insolvency #jobkeeper #xchainge #esg

References:

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview202021/JobMakerInsolvencyLawChanges

Contribution from Will Navratil

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