Coronavirus: Insolvency at 20-year low but for how long?

Company failure rates will rise in 2021, experts say, as emergency income support and temporary protections are removed.

Businesses are failing at their slowest rates in 20 years.

Australia’s company failure rates are set to increase from their lowest levels in more than 20 years as the Morrison government ­removes its blanket of emergency income support and temporary protections allowing businesses to trade while insolvent.

As new rules giving small enterprises greater flexibility to work their way out of difficulty commenced on Friday, the latest Australian Securities & Investments Commission data showed that only 946 companies entered external administration during the three months to September.

That was the lowest quarterly number of companies entering external administration since the end of 1999 at the height of the dotcom boom. It was also fewer than half of the 2182 recorded over the same period a year before.

Institute of Public Accountants general manager of technical policy Tony Greco said “the reality is the year accelerated pre-existing trends and, unfortunately, some business models aren’t going to be intact when things resume”.

“We do know there are a lot of unviable businesses receiving JobKeeper, and that ends in March,” Mr Greco said.

The ASIC statistics also show the average number of companies failing over the 12 months to ­December was down 40 per cent versus a year before.

The figures confirm that measures such as the business cashflow boost and, in particular, the JobKeeker wage subsidy program — which removed labour costs for employers struggling through the health crisis — has led to a historic plunge in the businesses entering administration.

Starting Friday, a simplified process is in place that allows firms with liabilities of up to $1m to — with the agreement of creditors — remain in control of their businesses as they restructure their debts.

Assistant Treasurer Michael Sukkar said the laws would assist more small businesses to restructure and survive during the COVID-19 pandemic.

“As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either ­restructure or to wind down their operations in an orderly manner,” Mr Sukkar said.

“For those businesses that are unfortunately unable to survive the economic impacts of COVID-19 recession, a new simplified liquidation pathway will be available to allow faster and lower-cost liquidation, increasing returns for creditors and employees.”

Mr Greco said while the insolvency reforms would provide a cushion for some business owners to navigate their way through a temporary cash crunch, firms and their advisers would still have some difficult conversations in coming months.

“The last thing you want is a business clocking up more and more debt that it won’t be able to repay,” he said, adding that the new US-style “Chapter 11” rules ­remained untested.

Those on the wrong side of what could be long-lasting trends — such as businesses catering to fewer workers in the CBD, tourism operators facing years of fewer international visitors, or companies unable or unwilling to grasp the fast-tracked digitalisation of the economy — faced a particularly uncertain future, Mr Greco said.

The pace of the economic ­recovery and how successfully states can suppress new COVID-19 outbreaks will determine how many COVID-affected firms ultimately survive the transitions off emergency support.

The signs are positive. Already 450,000 firms have graduated off JobKeeper between September and October, when eligibility rules for a new, lower payment were ­reapplied, albeit still leaving half a million relying on the wage subsidy program. Similarly, the latest data from the Australian Banking Association showed that just shy of nine in 10 of the more than 228,000 business loans deferred by the seven largest banks at the peak in June have now restarted payments.