2020 has created an abundance of stress for businesses around the world, and as businesses struggle to operate, they also struggle to pay their bills.
According to the Australian Financial Security Authority, between April and June 2020 there were 4,239 new personal insolvencies across the country. On average, there are just over 400 per fortnight, with a quarter of these involved in a business.
It might seem like a lot, but these figures are actually much less than it was first anticipated at the start of COVID-19, and while it was predicted that insolvency firms would experience an influx of new cases, the fallout of the virus hasn’t been anywhere near expectations.
When the virus first hit, a number of retailers were forced into administration or liquidation, and companies that carried a lot of debt to start with were also heavily impacted. Many did not survive the first few months of the pandemic. Small and medium-sized businesses, however, seem to have come through relatively unscathed – and this is largely due to Government support and packages available to assist businesses. So, what is insolvency, and what has been the impact around Australia?
Inability to pay debts
Insolvency is when a business or individual is unable to pay its debts when they are due. It’s more of a financial state, rather than a legal one. It becomes legal if creditors seek to collect their debts – at which point the business may be faced with one of three options:
Voluntary administration: Is where an insolvent company is placed in the hands of an independent person who is then able to assess the best outcome for both the business and the creditors.
Liquidation: This is when a company is in financial difficulty and the shareholders, creditors or the court choose to put the company into liquidation. The independent liquidator takes control and decides the best outcome for the benefit of creditors. Voluntary liquidation is where creditors vote for liquidation following a terminated company agreement or voluntary administration, while court liquidation is when a court appoints the liquidator on behalf of creditors, the ASIC, a shareholder, or director.
Receivership: This is where a secured creditor or court appoints an independent receiver to take control over the company’s assets to collect and sell assets to repay debt, pay money as required by the law, and report to the ASIC as necessary.
The Australian Government acted early when COVID-19 hit, introducing a range of measures designed to help small and medium-sized businesses who were faced with financial distress. The following is a breakdown of these offerings, all of which were introduced at the end of March:
Bankruptcy Threshold: The previous limit for a creditor to initiate bankruptcy claims against a debtor was $5,000. With COVID-19, this was increased to $20,000.
Bankruptcy Notice: Debtors were provided an extension of the deadline to respond to a bankruptcy notice – increased from 21 days to six months. This debt protection prevents recovery action by unsecured creditors for a period of six months. The extension was also relevant to the period of protection after which a debtor makes a declaration of their intention to present a petition.
The impact on insolvency firms
Insolvency firms have spent a lot more time in the past six months advising business owners about their options when it comes to insolvency and bankruptcy. There has been a large percentage of smaller businesses that are adopting a wait-and-see approach, particularly as the Government continues to pay bills and provide financial assistance. However, this is not the best approach, and it’s important that businesses start to prepare for the future as early as possible.
By using an insolvency practitioner for advice and assistance, business owners are working towards a brighter future. It could also help small and medium businesses avoid voluntary administration or liquidation, which is the best thing for all involved.