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Will 2022 be the year for mass insolvencies?

News

The tsunami of insolvencies which was predicted for 2021 when many businesses had to close their doors as a result of government lockdown directives and border closures, did not occur as it had been predicted. For the most part this was due to the financial support provided by the government. However, as support is phased out, corporate insolvencies are once again predicted to take off.  Charles Lethbridge, Attwood Marshall Lawyers Partner and NSW Law Society Accredited Specialist in Dispute Resolution discusses insolvency and how business owners can prepare for the worst.

Introduction

Many businesses survived the effects of the pandemic thanks to the financial support from state and federal governments.  As this support is relaxed, corporate insolvencies are set to increase rapidly.  Trade Credit Insurers Atradius forecast that while vigorous growth is likely for global economies in 2022, overall corporate insolvencies will increase by 33% – with Australia expected to record one of the highest cumulative insolvency growth rates.

High levels of insolvencies for Australia may also be attributed to the Delta variant outbreak the country experienced in mid-2021.  Australia’s GDP recovered more quickly than expected in the second quarter of 2021, but the economy suffered following the outbreak.

Data from the Australian Banking Association also demonstrates how complex it’s been for small businesses during the Delta outbreak and resulting government restrictions.  In August 2021, the amount of business loan deferrals increased nearly six-fold, rising from 600 to 3,500, with owners unable to make their repayments.

To date, however, the insolvency data does not yet reflect the much publicised (and anticipated) tsunami of corporate and personal insolvency appointments.

The current statistics

Personal insolvencies statistics 

The Australian Financial Security Authority (AFSA) statistics dispersed on 19 October 2021, reflects that personal insolvencies decreased 12.3% in the September 2021 quarter compared to the September 2020 quarter.  Other relevant points include:

  • 2,621 personal insolvencies occurred during the September 2021 quarter.
  • There was a decrease in personal insolvencies in all Australian states and territories apart from Tasmania.
  • The September 2021 figure of 2,621 is a further reduction of 2.3% in comparison to the June 2021 quarter, in which 2,682 personal insolvencies recorded.

In the September quarter of 2021, 34.2% of bankruptcies were business-related, a fall from 40.9% in the September quarter of 2020.  You can access a copy of the AFSA media release here

Corporate insolvencies statistics

The October 2021 Australian Securities and Investments Commission (ASIC) statistics demonstrate corporate insolvencies in Australia decreased 1.95% during the September 2021 quarter in comparison to the September 2020 quarter.  Also relevant is the following:

  • 1,760 corporate insolvencies occurred during the September 2021 quarter in comparison to 1795 in the 2020 quarter and 2910 in the 2019 quarter
  • There was a decrease in corporate insolvencies in all states except in NSW, Western Australia, and the NT, which all had a slight increase
  • However, the September 2021 figure (1,760) is an increase of 29% compared to the June 2021 quarter, where there were 1,356 corporate insolvencies recorded. 

Company insolvency

A company qualifies as insolvent where it cannot pay all its debts as and when they fall due.  Insolvency occurs in situations where the company has a surplus of assets but cannot liquidate those assets quickly.  It is common for a company to be insolvent where it fails to satisfy a statutory demand issued by a creditor.

Reasons that a business may go into external administration include:

  • it has become insolvent
  • is at risk of becoming insolvent.

There are three primary types of external administration:

  • Voluntary administration—an administrator takes control of the business to work out a way to prevent insolvency.
  • Liquidation—a liquidator takes control of the business to wind it up in an orderly and fair way.
  • Receivership—a secured creditor appoints a receiver to sell assets to repay the debt owed to the secured creditor.

Personal insolvency

Personal insolvency methods apply to sole traders and individuals that are in a partnership.

When there is inability to pay your debts the Bankruptcy Act 1966 (Cwlth) provides three standard methods for dealing with cumbersome debt:

  • personal insolvency agreement
  • debt agreements
  • voluntary bankruptcy

Declaring bankruptcy is a serious action.  Bankruptcy can last up to 3 years or more and will affect your ability to:

  • borrow money
  • travel overseas
  • perform certain jobs

Changes to insolvency law during the pandemic

 The COVID-inspired legislative amendments (Coronavirus Response Package Omnibus Act 2020, schedule 12) concerning insolvency commenced on 25 March 2020.  Initially, these were set to expire on 25 September 2020 but were extended until 31 December 2020 (Corporations and Bankruptcy Legislation Amendment Regulations 2020).  Ultimately, they provided that:

  • the amount in respect of which a creditor could issue a statutory demand increased from $2,000 to $20,000
  • the time a company was required to comply with a statutory demand rose from 21 days to six months
  • the current Safe Harbour provisions of the Corporations Act 2001 supplemented by additional temporary assistance to directors from personal liability for insolvent trading where the debt incurred in the normal course of business, on or after 25 March 2020 and prior to appointing an administrator or liquidator

Those changes have now ceased, and the situation under the current regime (Corporations Amendment (Corporations Insolvency Reforms) Bill 2020) is that:

  • the duration to comply with a Statutory Demand from 1 January 2021 is 21 days
  • the statutory minimum has reverted to $2,000
  • the additional support from insolvent trading claims has ended

In September 2020, the government proposed changes that would enable companies with liabilities of less than $1,000,000 to continue to trade during insolvency while a debt restructuring plan is determined, rather than having to move into administration.  In addition, a further ‘simplified liquidation process’ was also announced.

The Federal Treasurer explained the aim of the changes as being to move the system from ‘a rigid, one-size-fits-all creditor in possession model to a more flexible debtor in possession model’.  The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (‘Insolvency Reforms Act’) passed those proposals on 10 December 2020, effective from 1 January 2021.

There are two new insolvency processes for companies with liabilities of less than $1m, excluding employee entitlements:

  • a ‘debtor in possession’ debt ‘restructuring process, and
  • a simplified liquidation process.

Simplified liquidation process

Historically, liquidations have been onerous and expensive processes due to ASIC’s extensive reporting and investigative obligations on its liquidators.  Unfortunately, these obligations have only served to cause the liquidators more work, which costs more money for the company that needs the services. 

A simplified liquidation process is now adopted which allows creditors’ voluntary winding up for companies with liabilities less than $1 million.

Eligibility for the simplified liquidation process requires:

  • that the company must be in a creditors’ voluntary winding up where the event that triggers the winding-up occurs from 1 January 2021 onwards
  • liabilities of the company when a liquidator is first appointed in the creditors’ voluntary winding up cannot exceed $1 million
  • the company are unable to cover its debts in full within 12 months
  • within five business days (after the day of the meeting of the company at which passed the resolution for voluntary winding up) the directors must give to the liquidator:
    • a report on the company’s business activities
    • a declaration that, on reasonable grounds, they believe that the company is eligible for the simplified liquidation process
  • no person who is or has been a director of the company within the one year prior to the date a liquidator was appointed, has been a director of a different company that has been under restructuring or the simplified liquidation process in the previous seven years
  • the company has not restructured or implemented the simplified liquidation process in the previous seven years
  • the company has provided returns, notices, statements, applications, and other documents required due to the Income Tax Assessment Act 1997.

When must a liquidator stop the simplified liquidation process?

The liquidator must stop the simplified liquidation process if:

  • the eligibility for the simplified liquidation process is not met.
  • The liquidator believes that the company, or a director of the company, has engaged in conduct involving fraud or dishonesty.  That conduct has had a material adverse effect on the interests of creditors or a class of creditors.

After a company is in liquidation, the directors must provide the chosen liquidator with a declaration that the company is eligible for the simplified liquidation process.  Then the onus is on the liquidator to make the necessary declarations and statements to both the company’s creditors and ASIC that the company will adopt the new procedure.

Attwood Marshall Lawyers – helping business owners navigate the difficult times

As Australian insolvency numbers are expected to climb in 2022, if you or your business is at risk, you need to ensure you have appropriate solutions in place.

Our insolvency lawyers can assist clients in mitigating the risks of insolvent trading, including handling director’s liabilities, and director penalty notices.  Our Commercial Litigation team aims to ensure the process is as stress-free, cost effective, and as liberating as can be. We will help you navigate this difficult time in your life so that you can find the best solution for you and your business in order to move on with your life.  If you have received a bankruptcy notice or creditor’s statutory demand, don’t delay and seek legal advice immediately.

We take a tactical approach to help businesses faced with these complex matters.  With a history of more than 75 years assisting individuals and small to medium-sized businesses, we have a thorough understanding of the processes and ramifications associated with insolvent trading.

If you need an experienced team on your side to assist you navigate business and commercial matters, we can guide you and your business towards a successful outcome.  Contact Commercial Litigation Department Manager, Amanda Heather, on direct line 07 5506 8245, mobile 0425 260 837, or email aheather@attwoodmarshall.com.au

Read more:

Welcome change for the new year – new Insolvency Reforms activated to put business owners back in control

Temporary relief has come to an end for businesses impacted by the economic effects of COVID-19

Are you facing bankruptcy or is your business facing liquidation? It doesn’t need to be a stressful process

 

 

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