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‘Flatten the insolvency curve’, agency warns

Adrian Flores
Adrian Flores
16 June 2020 1 minute readShare
insolvency

The amount of company administrations that have been delayed due to relief legislation and court closures will likely compound the predicted rise in business closures when the government’s safe harbour measures finish in September, warns a credit reporting agency.

Administrations in April and May were 36.0 per cent and 34.1 per cent below the average for 2019, indicating that around 300 companies per month have stayed in business that would have otherwise folded in more normal conditions, according to data from digital credit reporting agency CreditorWatch.

The agency warned that these administrations will need to be processed on top of the inevitable increase in closures as a result of an economic recession, caused by the coronavirus.

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CreditorWatch chief executive Patrick Coghlan said this could be a “stay of execution” for struggling businesses and we should prepare for additional administrations when the safe harbour measures are lifted in September.

“This will put further pressure on an insolvency sector that has already suffered from a wave of redundancies. That’s why we have been calling on the government to create a special administration service and to consider measures to gradually flatten the insolvency curve,” he said.

 

Mr Coghlan added that that defaults and court actions have rebounded upwards after declines in March and April, something he believes is due to companies being sympathetic to the current unprecedented situation.

As a result, he argued that many businesses will skip the traditional “path to administration” steps and head straight to closure in September.

“Companies have held off registering defaults against customers or taking them to court for defaulting on payments due to the exceptional circumstances,” Mr Coghlan said.

“The safe harbour moratorium and insolvency law changes have enabled businesses to survive without the cash flow to cover their outgoings.”

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Mr Coghlan said CreditorWatch typically finds that 50 per cent of firms that default on a payment go into administration within 18 months.

“In just a few short months, the period for which directors are absolved of personal liability for trading insolvent will be lifted. Inevitably, decisions will need to be made as to whether or not a business is viable for continuation,” he said.

“The harsh reality is that many, many businesses will not be. Rather than burying their heads in the sand, firms should reach out to restructuring specialists now for advice; otherwise, they could well find themselves in court come September.”

‘Flatten the insolvency curve’, agency warns
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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