Business failure ‘Armageddon’ not here yet

CreditorWatch chief economist Harley Dale is not expecting an “Armageddon scenario”.

“But we are going to see through the June and September quarters this year a number of business insolvencies because of the horrific nature of the lack of demand in some sectors,” Mr Dale said.

Clayton Utz restructuring and insolvency partner Jennifer Ball said businesses would draw on savings they had built up during the pandemic.

“I suspect that we won’t see the real impact for a couple of months,” she said.

Kroll’s Mr Ayres suspected that businesses that had been receiving JobKeeper “are probably in the cut and thrust of working out what to do next”.

“Businesses firstly go to their lawyers or their accountants, and they’ll only go and seek help once they really feel like their back is up against the wall, and I don’t think that time has arisen just yet,” said Mr Ayres.

In its April Financial Stability Review, the RBA said it was expecting an increase in business failures over the months ahead. However, the central bank was not concerned by this prospect and said that it was consistent with a stronger economic outlook.

“A moderate level of insolvencies is to be expected in a healthy, dynamic economy and so insolvencies are expected to pick up during 2021,” the RBA wrote.

Business failures remained low in February, according to the most recently available public data from the Australian Securities and Investments Commission.

Just 342 businesses entered external administration in February, compared with 667 in February 2020 – a reduction of 49 per cent.

Support still out there

McGrathNicol chairman Jason Preston said the end of JobKeeper does not necessarily signal the end of the line for struggling firms.

“There’s still a lot of support around for companies,” said Mr Preston. He said the Australian Taxation Office, which is often a significant creditor for small firms, is continuing to be supportive of firms that have been adversely impacted by the pandemic.

Viable businesses have several avenues available to them to restructure their affairs. Clayton Utz’s Ms Ball suspects some businesses may have taken advantage of the 2017 safe harbour reforms, which allow businesses to trade their way out of difficulty instead of entering into an administration process.

New laws giving small businesses the ability to restructure their liabilities without going into administration could also offer struggling firms a path forward. However, Kroll’s Mr Ayres said take-up of the new process has been minimal to date.

“I’m not seeing any data that says there’s a big uptake of the [small business restructuring process] at all,” he said.

Ms Ball said the low number of firms making use of the new process could reflect the scheme’s limiting eligibility criteria, which requires a firm to have debts below $1 million and to have paid all due employee entitlements.

Low interest rates and a stronger than expected economic recovery are also supporting businesses.