Tens of thousands of businesses could collapse by mid next year as JobKeeper scheme ends, experts say
Tens of thousands of businesses could collapse by mid next year as changes to insolvency laws kick in and economic stimulus measures such as JobKeeper come to an end, insolvency experts say.
The insolvency industry has cautiously welcomed Treasurer Josh Frydenberg’s biggest overhaul of bankruptcy law in decades, drawing from key elements of the United States’ Chapter 11 laws.
But say they want to see the full details of the policy as that will likely determine how many businesses fall or survive.
Some insolvency experts believe the policy change could mean that “zombie” businesses, which have too much debt and poor management and have been ticking along due to emergency COVID-19 support measures, start to get identified.
Others fear the change could mean these zombie businesses keep trading, and there is not enough being done to tackle unqualified advisers who facilitate phoenixing and asset stripping.
Mr Frydenberg has not yet unveiled the full details of the proposal, but the premise is to allow business owners with liabilities of less than $1 million to stay in charge while they deal with their debts.
It helps the business avoid having to pay out hefty fees to administrators that deplete their assets and aims to give them more time to come up with a pathway out of debt.
Mr Frydenberg said an insolvent small business would have 20 days to come up with a restructuring plan, and creditors would have to vote on whether to accept it within 15 days after that.
For small businesses that cannot be revived, Mr Frydenberg said liquidation would be made quicker and easier, but has not announced the full details of how.
Insolvency spike expected once JobKeeper ends
Insolvency experts still fear a massive wave of business failures, which could be further exacerbated once the JobKeeper wage subsidies taper off and millions of employers and their workers lose access to the subsidy.
The Government plans to reduce JobKeeper from $1,500 to $1,200 per fortnight for full-time workers from the first week of October, with a further cut in January until the program ends in March.
Reserve Bank governor Philip Lowe is among those who have warned of pending business failures.
“There will be insolvencies,” Dr Lowe told a parliamentary committee last month.
“There will be bankruptcies. There will be some businesses that will not recover.”
Australian Restructuring Insolvency & Turnaround Association chief executive John Winter said last year there were about 8,000 insolvencies, but he expects that number to leap.
He said there were 2.4 million small businesses in Australia and the ABS had previously suggested about 10 per cent (240,000) would shut.
But he said given COVID-19 stimulus measures such as JobKeeper were being slowly wound back, he thinks the number will be far less.
He estimated about 24,000 businesses could go under by mid next year.
“Some sectors in tourism and hospitality need to close because the market just isn’t there anymore,” Mr Winter said.
Under the Federal Government’s proposed changes, creditors would still be able to take action to wind up a company.
“This is about helping businesses that are proactive and trying to survive — it’s not about [saving] businesses that are dead in the water and are doing nothing,” Mr Winter said.
But he conceded creditors such as suppliers and employees may not in practice accept businesses racking up more debt while the restructuring occurs.
Creditors may still take action against a business
Australian Small Business and Family Enterprise Ombudsman Kate Carnell said the changes would help reduce the threat of creditors taking action against a small business.
“Crucially, these measures give otherwise viable small businesses more time to recover, preventing a wave of unnecessary insolvencies,” Ms Carnell said.
But she noted ASIC data showing insolvencies are tracking at close to 50 per cent below 2019 levels.
“[This] goes to show the extent to which government stimulus and protection measures are keeping businesses on life support, including businesses that have not been viable for some time,” she said.
EY Restructuring Leader Adam Nikitins said while the policy change was welcome — “in that the whole idea is to keep blood pumping into the business” — the market could still react poorly to businesses under stress.
“If there’s no cash liquidity, the way the market reacts is that they stop supply or go on cash on delivery terms,” Mr Nikitins said.
He said it was also common for the directors of small businesses to have guaranteed the company’s debt personally, often by a mortgage on the director’s home, leaving the directors personally exposed.
Given the restructuring process would run for 35 days, he said trade suppliers will almost certainly refuse to extend credit over this period and the business will need cash to operate over this period.
But he said the change would likely bring Zombie companies to light, and many of those poorly managed companies would fall over.
“Zombie companies are ones that should fall over — that should be closed or liquidated,” he said.
“The triggers for intervention are coming back into place.”
Mr Nikitins also agreed that there would be a rise in insolvencies but refrained from putting a number on it.
“We expect insolvencies to increase because of pent-up demand,” he said, noting it would likely happen by mid next year.
Experts fear ‘zombie’ businesses get protected
Mr Frydenberg has said the reforms would cover about 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees.
It would reduce the time they spend dealing with the insolvency process.
“And ultimately [it will] help more small businesses get to the other side of the crisis,” Mr Frydenberg said.
But some insolvency practitioners worry that giving all small businesses facing financial hardship blanket protection is a bad idea.
Deloitte’s national restructuring leader Sal Algeri said the only basis on which a business should be given the protection is if they have directly suffered because of COVID-19, not other factors such as poor management.
He said he wanted the right businesses to be able to access the regime, rather than all businesses irrespective of the circumstances.
“My question mark is, are we making sure that we are not allowing businesses that are poorly managed to continue,” Mr Algeri asked.
Mr Algeri also predicted there would be an uptick in insolvencies by mid next year.
The chief economist at Creditor Watch, Harley Dale, said he was unsure Chapter 11-style bankruptcy laws were the best approach, and also feared this would mean zombie companies get protected.
“There are businesses out there that are not economically viable with or without government support,” Mr Dale said.
“So why you would want to continue to support those businesses?”
He said it would be either later this year or in early 2021 when mass insolvencies numbers start to roll in, and the end of JobKeeper would heighten the number of businesses under stress.
Associate director at Pilot Partners and insolvency expert Cameron Woodcroft said there would “definitely be zombie companies out there now that should be in liquidation but aren’t”.
He said if businesses were severely cash starved, it would still be hard for them to devise a pathway out of debt.
“What funds will they be using to pay creditors if they are already cash strapped,” Mr Woodcroft asked.
Call to shut down ‘dodgy’ advisers
The Federal Government is also seeking to address concerns that there would not be enough insolvency practitioners to deal with the number of businesses needing to restructure or liquidate.
It is proposing encouraging more professionals into the field, such as waiving registration fees for two years.
It has also said it will create a new class of insolvency practitioners who will only work with the simplified small business process.
Mr Winter said he wanted to see the detail of what was being proposed.
He said the Government needed to shut down the “exploding level of dodgy, unqualified advisers who facilitate phoenixing and asset stripping”.
And he warned against the Government watering down qualifications for industry professionals.
“It would be of profound concern if the Government reduces the requirements on minimum education and competency,” Mr Winter said.
“That would fly in the face of all that came out of the Hayne royal commission.”
The proposed reforms will be put to Federal Parliament within weeks and the Government plans to have them passed so they take hold on January 1.
Opposition Treasury spokesman Andrew Leigh said the Government needed to do more to crack down on dodgy directors that were using current insolvency laws in order to “rip off workers, other businesses and taxpayers”.
“This so-called phoenixing activity is costing the economy billions of dollars a year, and yet the Coalition has failed to act and put in place the sensible reforms we know would work,” he told Sky News.
“Things like a director identification number, cascading trusts for large construction projects, would give a great deal of certainty that people aren’t abusing insolvency laws in order to rip the money out of those firms and take it off to line their own pockets.”