In March 2020, the Australian Federal Government introduced a number of economic measures to mitigate the impact of COVID-19 restrictions on Australian business. Analysing the statistical records of ASIC, we can see that the number of companies entering external administration has significantly reduced in April and May 2020.
There is no doubt as to the impact that COVID-19 has had on our economy and more specifically insolvencies. While the Federal Government’s economic measures have undoubtedly saved scores of companies from failing, for many it has only delayed the inevitable.
After Government protections and stimulus cease, we expect to see a flood of insolvency appointments. Many companies will be struck by a liquidity crisis as their working capital dries up. Subject to further announcements that is likely to be November. If they can get stock, retailers will make it through to the new year, but probably not for much longer. While there is no doubt that most, if not all, of the companies that fail will blame the impacts of COVID-19, in reality, a large portion of them were destined to fail well before any shut down of the economy.
Continue on for our analysis of the situation.
DIP BEFORE THE BOOM? – THE IMPACT OF COVID-19 ON INSOLVENCY APPOINTMENTS
Our Credit Issue of 24 March 2020 outlined various economic measures taken by the Australian Federal Government to mitigate the impact of COVID-19 restrictions on business. Analysing the statistical records of ASIC, we can see that the number of companies entering external administration has significantly reduced in April and May 2020.
Subject to fresh announcements, with the economic measures all due to cease come the end of September 2020, will the lull in insolvencies continue or will a flurry of appointments be made post September?
Companies entering external administration
During the financial year to 30 June 2019, there were 8,105 external administrations, averaging 2,026 per quarter. For comparative analysis, 6,010 external administrations occurred during the nine months to 31 March 2019.
Full data for the June 2020 quarter is not available as at the date of publishing this Credit Issue. For the nine months to 31 March 2020, there were 6,159 external administrations, 149 more than the same time last year. Those are summarised as follows:
The following table breaks down the available monthly data for the 2018/19 and 2019/20 financial years:
From the above, it is clear, but not unexpected, that there is a drop off in external administrations in April and May 2020. To explain this reduction, an analysis of the types of appointment needs to be made.
Court windings up (incl. provisional windings up)
The following table breaks down the available monthly data for the 2018/19 and 2019/20 financial years for Court windings up:
Court actions against debtor companies significantly dropped from January 2020 when compared with the year before.
The Federal Government’s economic measures, particularly those surrounding statutory demands for payment, have had a large impact on the Court winding up figures for May 2020. Winding up figures dropped less in April 2020 due to the announcement lag factor. We know that the ATO suspended the processing of winding up applications in at least early February. Whilst advertising of applications occured in January, we speculate that the ATO suspended most winding up activity early as a consequence of the devastating Australian bush fire summer.
Creditors’ voluntary windings up
The following table breaks down the available monthly data for the 2018/19 and 2019/20 financial years for creditors’ voluntary windings up:
Creditors’ voluntary liquidations for nine months to 31 March 2020 are slightly higher than same time last year. The Federal Government’s economic measures have had a double effect since the end of March 2020; firstly, giving directors protection from insolvent trading and, secondly, restricting creditors’ ability to wind up insolvent companies.
Receiver, manager and controller appointments
The following table breaks down the available monthly data for the 2018/19 and 2019/20 financial years for receiver, manager and controller appointments:
Receiver, manager and controller appointments are generally appointments made by a bank or other secured creditor. Such creditors are already reluctant to make formal appointments, particularly after last year’s royal commission into the banking industry. Appointments are usually only made as a last resort after significant work has been undertaken with the debtor company.
The level of appointments being unaffected by the changes in the economy reflects the way secured creditors see receivership appointments as an option of last resort.
Voluntary administrations (incl. scheme administrations)
The following table breaks down the available monthly data for the 2018/19 and 2019/20 financial years for voluntary administrations:
Virgin Australia’s entry into voluntary administration in April 2020 saw appointments made to 38 companies, propping up the appointment rate. Had Virgin Australia not entered voluntary administration, a drop in appointments would have been observed.
The Federal Government’s economic measures have given companies and their directors protection, resulting in a decrease in voluntary administration appointments.
Observations of the June 2020 quarter and expectations of the September 2020 quarter
We attribute the decrease external administrations to the implementation of the Federal Government’s economic measures. We have no doubt that had the Federal Government not intervened, we would have observed a significant increase in companies entering external administrations. Key factors are JobKeeper, refunds of PAYG withholding and the ATO backing off.
Prior to April 2020, appointments for the 2019/20 financial year were more or less tracking in line with the previous year. Were it not for the disruption to the economy as a result of COVID-19, it is reasonable to suggest that external administrations in the June 2020 quarter would have mimicked those in the June 2019 quarter.
Therefore, we estimate that the Federal Government’s stimulus measures have propped up between 250 and 305 companies per month, thus resulting in an estimated 750-915 companies avoiding external administration in the June 2020 quarter.
The Federal Government’s economic measures protecting companies and their directors will continue to 22 September 2020. For this reason, we expect external administrations in the September 2020 quarter to be similar to the June 2020 quarter. This will result in a further 750-915 companies avoiding external administration in the September 2020 quarter.
Prediction for the December 2020 quarter and beyond
Voluntary appointments (creditors’ voluntary liquidations and voluntary administrations)
Appointments made in October 2020 are likely to fall into three loose categories.
First, with director protections due to cease in September 2020, we expect that companies that were previously destined to fail, will do so from October 2020. If this were to be in line with appointments in October 2019, we estimate between 451 to 501 appointments would occur before taking into account the disruptive economic changes in recent months.
Secondly, given the ongoing strains on the economy, we estimate there to be a 10-15% increase on appointments on October 2019, accounting for 48 to 71 appointments. This is notwithstanding recent reports of possible various industry specific stimulus.
Finally, we conservatively expect approximately 20% of the companies being propped up by Government stimulus which otherwise would have failed in April 2020, will enter into a voluntary appointment in October 2020. A further 40% will effect an appointment in November 2020, 20% in December 2020 with the remaining 20% likely to turn themselves around during the stimulus period. We estimate this will account for between 22 to 32 appointments.
In total, we expect to see 520 to 604 such appointments in October 2020.
Using a similar application, we expect to see 559 to 662 appointments in November 2020 and 505 to 616 appointments in December 2020.
Appointments are likely to continue to increase well into 2021 as government stimulus fades.
Court liquidations are unlikely to pick up until November 2020 as a result of the time lag with issuing statutory demands for payment. In addition to this, the vast majority of Court liquidations are commenced by the ATO.
The ATO is difficult to predict as it does not have the same motivations as commercial creditors. During times of significant downturn, such as those we are currently experiencing, the ATO will often slow down winding up proceedings. For this reason, we will not attempt to forecast Court appointments.
There is no doubt as to the impact that COVID-19 has had on our economy and more specifically insolvencies. While the Federal Government’s economic measures have undoubtedly saved scores of companies from failing, for many it as only delayed the inevitable.
After Government protections and stimulus cease, we expect to see a flood of appointments being made. Many companies will be struck by a liquidity crisis as their working capital dries up. Subject to further announcements, that is likely to be most severe in November. If they can get stock, retailers will make it through to the new year, but probably not for much longer. While there is no doubt that most, if not all, of the companies that fail will blame the impacts of COVID-19, in reality, a large portion of them were destined to fail well before any shut down of the economy started.
Disclaimer (14 July 2020):
Since the initial drafting of this article, Prime Minister Scott Morrison has suggested that the Federal Government’s JobKeeper is likely to be extended in some way. Treasurer Josh Frydenburg has also commented about extending the reach of COVID-19 stimulus.
We are currently experiencing unprecedented times which are leading to unprecedented measures being taken by our Governments. Forecasting has only been made on currently confirmed economic responses and is subject to change with announcements of further stimulus and relief.
Business Turnaround & Restructuring
Corporate & Personal Insolvency
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