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‘Extended insolvency protections will prolong the inevitable insolvency cliff’

Maja Garaca Djurdjevic
Maja Garaca Djurdjevic
08 September 2020 2 minute readShare
Extended insolvency protections

A decline in voluntary administrations, coupled with the government’s recently announced extension of temporary insolvency and bankruptcy protections, is causing a backlog of cases that will result in a tsunami of liquidations in the future, an expert has warned.

New data from Prushka Fast Debt Recovery has revealed a significant decline in the number of liquidations and administrations since April this year, with voluntary liquidations down by a staggering 53 per cent year-on-year between June and August.  

But Prushka is not alone in predicting a problem. Recent ASIC data has revealed that insolvencies are tracking at close to 50 per cent below 2019 levels, while Deloitte Access Economics modelling estimated about 240,000 small businesses are at risk of failure.

Roger Mendelson, CEO of Prushka, said the clear decline in the number of liquidations, in conjunction with the ATO and most governmental agencies essentially ceasing winding up companies, is creating a backlog that will result in a tsunami of liquidations in the future.

“Directors are simply waiting to see what will transpire with the economy and are avoiding spending money liquidating their company when they aren’t under pressure from creditors,” Mr Mendelson said.

“The government recently announced the extension to 31 December of responding to statutory demand from 21 days to six months. This just perpetuates a safe harbour for businesses to make it unviable to take wind-up action until the new year, further fuelling the insolvency cliff.”

But Mr Mendelson fears the post-stimulus period, noting that once the government even slightly reduces the COVID-19-related support mechanisms, a different trend will emerge.

“This backlog of cases could cause major economic dislocation post-COVID in a time where we will need entrepreneurs thriving and small-business owners working towards rebuilding,” he said.

Prushka raised the alarm on the astronomical build-up of insolvent companies at the end of FY20, which will need to be addressed in the future due to the largest creditor, the ATO, ceasing activity.

“Now we’re seeing the reduction in voluntary liquidations, just adding more weight to the existence of zombie businesses and will increase the post-JobKeeper cliff,” Mr Mendelson continued.

On Monday, the federal government announced an extension of temporary insolvency and bankruptcy protections to support struggling small businesses impacted by the COVID crisis.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, applauded the move, but warned that a number of zombie businesses will be kept artificially afloat as a consequence.

“My office continues to recommend the establishment of a small-business viability voucher program, where small-business owners facing financial stress can obtain a voucher valued up to $5,000 to access tailored advice on the state of their business,” Ms Carnell said.

“The voucher would ensure small businesses have access to the expertise they need to judge business viability.”

She warned that, unfortunately, small businesses with cash-flow issues, compounded by falling revenue, may not seek out professional advice because it’s deemed to be unaffordable.

“This could prove to be devastating for the business owner, and their family, down the line,” she said.

“We know the sooner a small-business owner experiencing financial stress seeks assistance from an accredited professional, the better the outcome.”

‘Extended insolvency protections will prolong the inevitable insolvency cliff’
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Maja Garaca Djurdjevic
Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of My Business. 

Maja has a decade-long career in journalism across finance, business and politics. Now a well-versed reporter in the SME and accounting arena, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies and enabling citizens to influence decision-making.

You can email Maja on [email protected] 

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