Plans needed to avert insolvency tidal wave

The head of Australia’s peak body for insolvency practitioners warns of an insolvency tidal wave when economic support ends.

The Australian Restructuring Insolvency and Turnaround Association says allowing so many businesses to trade that otherwise might have been wound up risks debt contagion.

Australia’s peak body for insolvency practitioners has warned of growing risks in government COVID-19 support schemes that are allowing potentially non-­viable businesses to continue to trade.

Insolvency numbers across the country are sitting around 40 per cent below long-term averages, after collapsing in April as measures including the JobKeeper wage subsidy scheme and director liability relief for insolvent trading were introduced.

But the Australian Restructuring Insolvency and Turnaround Association says allowing so many businesses to trade that otherwise might have been wound up risks debt contagion and could overwhelm the resources of the country’s insolvency practitioners.

“When businesses continue to trade and rack up greater debts there is a flow-on to other businesses,” ARITA chief executive John Winter told The Australian.

“This means that when businesses do go broke these poor other companies are going to sit there with much bigger debt, which is going to put them at risk of being insolvent.”

Mr Winter said the ripple effects could also endanger the balance that allowed the insolvency industry to function.

“The insolvency profession needs to undertake a vast amount of work to roll up a business; liquidators write off an average of $100m of unrecoverable work each year,” he said.

“What that means is that when these businesses are ‘more broke than broke’, liquidators are going to arrive and there’s no money to pay ASIC fees, let alone the liquidators.

“There is a real risk that liquidators will need to say on a commercial basis that ‘unless someone pays me to do this job I can’t do it’.”

Mr Winter said the number of current insolvencies was so low that 55 per cent of ARITA’s liquidator members had turned to JobKeeper to tide them over.

“Insolvency practitioners are well prepared to take their own advice, but it’s a canary in the coal mine moment.

“It’s saying that while the government was quite rightly trying to support the industry and economy … the consequence of this has been businesses that needed to be closed down have not,” he said.

ARITA is calling on the government to recognise the mammoth task ahead and take one or more of the three solutions it suggests: introduce a streamlined insolvency system as recommended in 2014; expand the asset-less administration fund; or create a $5000 to $10,000 voucher scheme for small businesses to fund liquidation or viability accountancy advice.

“We need to think about ways of being honest about the difficulties people are facing and getting those healthy discussions happening,” Mr Winter said.

The comments come ahead of a national economic update on Thursday, at which Treasurer Josh Frydenberg will provide details on the future of JobKeeper and other COVID-19 support programs.

Chartered Accountants ANZ recently recommended the implementation of a one-off voucher system to give businesses early access to professional advice on their prospective viability after government support ends.

Council of Small Business Organisations Australia chief executive Peter Strong told The Australian he supported a voucher system but there needed to be a reassessment of bankruptcy for businesspeople in light of the COVID-19 shutdown.

“If they’ve gone insolvent because of a virus they’re the ones we need to make sure can get through the insolvency as good as they can,” he said.

“When they come through we need to have them in a position to start a business again.

“If you’ve operated a business for a long time but you’ve gone bankrupt during COVID-19 you shouldn’t have to wear that ­stigma.”

Australian Small Business and Family Enterprise Ombudsman Kate Carnell said it was important that the liquidation system was appropriate for owner-operators and “not eat up any more funds that are absolutely necessary”.

“The amounts of money involved are quite low in comparison to larger businesses.

“So we are looking for changes that have a defined timeline and a cap on costs wherever possible,” she said.