Insolvency industry bears brunt of COVID-19 concessions

A survey conducted by ARITA, Australia’s peak body for insolvency and restructuring experts, has revealed the substantial impact the Government’s response to COVID-19 has had on the industry.

As outlined in a previous update, the Government has introduced a series of temporary measures in response to the pandemic, including; increasing the minimum amount for a statutory demand from $2,000 to $20,000, suspension of director's personal liability for insolvent trading and an additional safe harbour provision.

Conducted on April 17, the survey of almost 200 insolvency professionals indicated that as a result, insolvency levels have fallen significantly below the standard.

Relevantly, 38.6% of insolvency professionals surveyed reported that their current level of work was significantly less than this time last year and a further 17.8% said it was slightly less. Moreover, 31% of respondents indicated that the quantity of ‘safe harbour’ advisory work was down on the same time last month.

As the current environment continues to place pressure on the industry, more than half of all insolvency firms have registered, or intend to register, for the Government’s JobKeeper subsidy, indicating that year-on-year revenue has declined by at least 40%. The survey also revealed that 13.6% of firms are very concerned about their viability in the next 6 months and a further 42.4% are slightly concerned, with 19% having recently implemented redundancies.

In presenting the findings of the survey, ARITA CEO John Winter noted that, ‘In a typical year, we see around 8,000 natural insolvencies. There is always a natural level of insolvencies as businesses go through their natural lifecycle and it’s a healthy process. What we are seeing is that even businesses that are insolvent are delaying taking action to deal with that.’

Despite acknowledging that the Government efforts had been effective in supporting many businesses struggling in light of the pandemic, he warned that ‘a side effect of that is that businesses that under normal circumstances would have been wound up, are continuing to trade. Many of them will continue to rack up debts with unwitting creditors – quite likely SME’s themselves who are already under financial pressure, too.’

Finally, he acknowledged the ‘genuine concerns from insolvency professionals that, without the behavioural handbrake of insolvent trading laws, directors of businesses large and small are going far deeper into insolvency than they otherwise would have, with no chance of turning their business around. And it’s creditors who will wear the cost of that down the line.’

The survey follows an earlier study conducted by the ABS in April which found that two thirds of Australian businesses were experiencing a reduction in turnover or cash flow and that 64% reported a reduction in demand for their products or services.