What Insolvency Tsunami? An Insolvency Market Update
CEO of ARITA, John Winter, joins the podcast to take a look at the last few years of the insolvency market. Including that pandemic prediction, the impact of pre-COVID reforms, and a look at what's yet to come...
Australian Restructuring Insolvency and Turnaround Association (ARITA) insolvency market update.
Why is this topic relevant?
With recent economic pressures like inflation many households and businesses have been struggling, especially those businesses servicing debt. Add in an acute labour shortage and a war in Europe that disrupted energy and commodity markets and you’ve got a recipe for disaster – companies entering external administration rose 23% year-on-year to the June Quarter.
Despite that extraordinary increase, the number of corporate insolvencies is still below pre-COVID-19 pandemic levels. The Parliamentary Joint Committee on Corporations and Financial Services is currently conducting an inquiry into corporate insolvency in Australia. ARITA has recently made 36 recommendations to the Committee in its submission to the inquiry, including that “the government embark on comprehensive reform of Australia’s insolvency system”.
Successive governments got a bit lazy with Australia’s insolvency regime, with the last comprehensive review being the Harmer Inquiry in the 1980s.
After around 2015 and after an inquiry by the Productivity Commission, various reforms were trickled through in the insolvency space – some of which were recommended by ARITA – including safe harbour laws, the prohibition of ipso facto clauses and the creation of director identification numbers.
The small business restructuring process and simplified liquidation have not been effective reforms. In John’s words, they are a “disaster”.
Simplified liquidation was meant to provide businesses with a very low cost way of exiting as the majority of insolvent businesses never enter proper external administration due to the costs.
The small business restructuring process is effectively a copy of Part 5.3A voluntary administration. It is as complex and far more expensive than was intended. Both reforms require redrafting and should be simplified.
During the COVID-19 pandemic in 2020 multiple things happened at a government level to stem a then-predicted wave of insolvencies.
Insolvency statutory demands were largely suspended. JobKeeper was introduced. The ATO also stopped their wind up operations, stopped issuing director penalty notices and stopped issuing warning letters.
This led to the amount of companies entering insolvency to significantly decrease. As a result, the increase in zombie corporations and so-called insolvency “tsunami” also did not occur when it was predicted.
Very, very few registered liquidators are bad apples and encourage bad practice as they are heavily monitored and regulated. Instead, pre-insolvency advisors often coach business in avoidance strategies such as phoenixing.
John suggests that pre-insolvency advice should become a highly regulated profession.
Phoenixing activity is difficult to define, however, it is the process where you take a distressed business, cast off the debts and restart that business, not having honoured the obligations that you have to your creditors.
John defines phoenixing by saying; “[if] it walks like a duck, it quacks like a duck, it’s a duck.” John draws the parallel that the voluntary administration regime is a legal way to phoenix.
John predicts that insolvency levels will return to pre-pandemic levels. The new Parliamentary Joint Committee will make recommendations for short-term law reform and also call for a root and branch review
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