Are we heading towards an insolvency ‘tsunami’ in 2021?
The tide went out on insolvencies in 2020 with unprecedented Government financial stimulus, policy and regulatory change targeting business survival at all costs. In tandem with payment forbearance from the ATO and banks, the suite of business continuity measures arguably overachieved, such that corporate insolvency activity more than halved in the nine months to 31 December 2020.
As the stimulus now subsides, will the predicted insolvency tsunami eventuate? The jury is out but some determining factors are discussed below:
Business confidence: The stop/start COVID-19 lockdowns will remain a drag on business confidence throughout 2021, impacting investment, employment and wage growth. Subdued activity will challenge many businesses’ survival.
The ATO: Debts owed to the ATO spiked materially last year, particularly in the small business segment. As a creditor of almost every business, the ATO’s management of the debt unwind will play a critical role.
Unemployment: The end of JobKeeper will present the greatest challenge for businesses, as many large businesses will be forced to reduce staff numbers and costs. This will negatively impact consumer confidence and spending, and in turn, business confidence. The hardest hit industries will require ongoing targeted financial assistance, with travel and tourism front of mind.
Liquidity: Cheap debt and time is available for good businesses. Lesser quality businesses with expensive private debt are at a disadvantage in a low growth environment which can lead to enforcement action, an issue that is prevalent in property development.
Strategic insolvency: An increase in strategic insolvencies is likely, as businesses seek to restructure and reset their cost bases.
Cross border insolvency: Australian arms of multinational businesses may find themselves caught in cross border insolvencies (such as Chapter 11) where the rules are different and the economic recovery pathway may be more challenging.