What has happened about the predicted insolvency tsunami?
Pundits predicted there would be a consequent tsunami of insolvencies as COVID-19 government stimulus eased. They said Australia lacked enough insolvency practitioners to cope with the impending disaster.
There will be an increase in company collapses this year compared with last year – when external administrations were down 54% compared with 2019 because of the stimulus – but while this might qualify as somewhat of a wave, it will be far short of a tsunami.
Then what happened to the tsunami and what are expectations for the future?
How can it be that more businesses have already unexpectedly survived the pandemic, and thousands that have closed their doors and were never expected to open them again will most certainly do so?
Answers aren’t always obvious
State and Federal Governments’ economic stimulus is of course one reason why so many companies have done so much better than even the most optimistic of optimists thought possible, but thousands of businesses have not closed permanently following shutdowns because last year they stashed cash – in many instances substantial amounts of it from government support programs.
It's now an open secret many small to medium sized enterprise has more cash in the bank than before the pandemic.
Business operators have also been smart and seized opportunities arising from government boosts to their tax flows, to negotiate debt payment arrangements with the Australian Taxation Office (ATO), landlords and other creditors.
SMEs’ biggest and most common creditor, the creditor most likely to force them into administration and usually liquidation, is the ATO. Arrangements with the ATO to settle legacy debts over much longer periods are now not only increasing the immediate survival rate for pandemic-stricken businesses but also providing liquidity that allows business owners to exercise a wider range of options for the future.
Businesses’ new look
The pandemic has forced businesses to reassess their futures.
Many business owners, looking to downsize or in some instances grow their companies, have rejigged business plans and renegotiated long-term contracts.
These plans are putting greater emphasis on satisfying the needs and expectations of a business’s clients and are recognising this approach in sharper focus than previously, as essential to post pandemic success.
JobKeeper of course saved many businesses from insolvency, but more than this it has enabled employers to keep highly valued employees on their books, a by-product of which is two-fold. Staff retention has tended to heighten their loyalty as a bankable asset for the future, and expensive, disruptive redundancies have been avoided.
In contrast to a negative response to clients’ needs during the global financial crisis (GFC), banks have, during the COVID-19 pandemic, been prepared to help financially stressed clients survive in business.
Federal legislation imposing a temporary moratorium on prosecutions for trading while insolvent, has given companies time in an historic low interest environment to reorganise financing in very active second and third debt markets.
There will be no move by banks in the current crisis to push businesses into insolvency, which, had they done this, could have started a wave of insolvencies that developed into a tsunami.
It’s a different business landscape
The economy is responding to unprecedented fiscal and monetary stimulus to record the fastest recovery from a recession in 45 years, and analysts expect economic growth to gain momentum and rise to 5% this year.
When the Federal Government feared Australia lacked enough insolvency practitioners to handle the widely predicted tsunami of company collapses, it introduced small business restructuring legislation. To the best of Macks Advisory’s knowledge only seven companies have successfully availed themselves of this legislation.
Does this mean dealing with the immediate future and beyond will be the proverbial piece of cake for businesses? Not on your nellie. Analysts on all sides are telling us businesses should expect a rollercoaster ride, but that most will survive it in good health.
But they may need to confront significant challenges during the ride.
Aligning shareholders and boards
Sources tell us that one of the biggest challenges currently facing businesses, is aligning shareholders and company boards on strategy.
There are many paths to the future that can be taken by companies as they emerge with funds behind them from COVID-19’s lock downs and other restrictions. Debt is cheap, there are apparently plenty of investors on hand willing to take equity in businesses, and a rejigged business plan can take several viable forms.
It can therefore be a major challenge for boards to have shareholders agree options chosen and courses of action intended are the best available for the business.
Abundance of choice is frequently causing tension in family businesses because of differing generational perspectives relative to age and attitudes to risk-taking. Directors’ polarisation on things like this too often results in inaction that means opportunities are lost, or worse that a company’s delay in acting to avoid disaster assures it will happen.
Given these problems, and that the forecast insolvency tsunami is off the radar, it’s hardly surprising Treasurer Josh Frydenberg has signalled interest in extending use of the regulatory shield that is helping directors nurse corporate Australia stricken by the corona virus, back to good and lasting health.
