Insolvencies and fraud likely to rise if stressful conditions continue
The Delta variant has returned the majority of the nation to restrictions and a mixture of snap or prolonged lockdowns. This has impacted business and consumer sentiment (which sits at a twelve-month low) and has created an uncertain outlook as the nation races to achieve the 70-80% vaccination target to get moving again.
In this review, we reflect on our previous forecast and anticipate what’s to come for businesses in the remainder of the year.
Where’s the tsunami?
There were predictions at the start of 2021 of an impending insolvency tsunami, though we considered the jury to still be out, pending factors such as business confidence, unemployment, available liquidity and the ATO’s stance to debt recovery.
ASIC statistics show that the rate of business insolvencies is around 40% below pre-pandemic numbers, whether this is measured i) on a rolling twelve-month basis; ii) for the six months ended 30 June 2021; and iii) for FY22 YTD.
The insolvency statistics belie the financial strain and mounting pressure facing many businesses. Deferral policies have provided time rather than relief from liabilities. The end of JobKeeper and wind back of other stimulus measures are now confronting many businesses, particularly those having to pay accumulated taxation debts previously deferred.
In Melbourne, the impact of 200 days in lockdown is plainly visible with shop vacancies prominent in the CBD and surrounding shopping precincts. Similarly, the recent extension of the Sydney lockdown will exacerbate financial strain in our largest marketplace.
ASIC statistics for the last 12 weeks point to a 15% increase in Australian business insolvencies relative to the comparable period last year. Although not a representative sample size, without significant government support, we anticipate the recent uptick in business insolvencies to continue for the rest of the year if lockdowns continue to make business conditions unfavourable.
Heightened risk of fraud
As previously highlighted, stressful business conditions have led to an increasing prevalence of fraud. Instances range from the use of false invoices to defraud an invoice factoring funder, through to much more sophisticated efforts such as those surfacing in the Forum matter. There are several consistent themes that are making creditors more susceptible to fraud:
- increased reliance on technology in the funding approval and drawdown process;
- use of intermediaries, agents and other third parties sitting between the lender and borrower;
- higher volume of transactions being facilitated in businesses through the use of technology;
- competitiveness between lenders to provide the most generous terms and most efficient path to funding;
- introduction of new off-shore lenders not familiar with Australian lending and business practices; and
- businesses under pressure from challenging operating environments, increasing the likelihood that directors and management will use fraudulently gained funds to plug funding holes generated by losses in the short term.
We expect this trend to continue given the above environmental contributors are likely to prevail for some time.