Effects of the Cessation of Government Support in Insolvency
The Morrison government’s moratorium on insolvent trading laws has led to a sharp decline in administrations during the COVID-19 pandemic. CreditWatch’s latest data identifies that late payments have surged to an average of 49 days in June 2020, up from 11 days in June 2019.
Patrick Coghlan, Chief Executive of CreditorWatch has attributed the spike in late payments as a sign of the level of failure that was likely to come when banks’ interest rate deferrals, insolvent trading relief and major government support such as JobKeeper payments cease.
It is obviously difficult to predict the aftermath of the cessation of government support, amongst other things. However, it would be incredibly naïve to believe that the ongoing pandemic will not have a drastic effect on the viability of thousands of companies.
While much importance has been placed on flattening the curve, in referring to the daily infections rate, it too, is important to flatten the curve for ill/failing companies who even before the outbreak of COVID-19 were struggling to stay afloat. As such, banks will need to make tough early decisions even during the period were the government is providing targeted support to these ill/failing companies.
There is no doubt that the banks are currently assessing whether certain companies should be operating. More importantly, these companies should engage in open and frank dialogue with the bank and a restructuring specialist from Roser Lawyers.
Although perhaps not the ideal scenario for many companies, this would certainly provide a smoother curve in terms of insolvency happening over a longer period of time. However, should consideration not be paid to the above, it is likely that once JobKeeper, interest rate deferrals and insolvent trading relief cease, there will be a large spike in administrations.
Recently, the major banks have extended their interest deferrals on $260 billion in loans for an additional four (4) months, while Federal Treasurer Josh Frydenberg has advised that there is likely to be a further extension to the moratorium on insolvent trading laws and support measures such as JobKeeper.
While these measures will assist companies in a critical state continue to operate, it will also provide them with an opportunity to seek professional advice in respect of making some tough decisions should the company not be able to survive the pandemic.
Given the circumstances, and the aid provided by the government, there are a large number of companies that have not gone into administration when they normally would have. We are now at a point in time where the banks will assess where their resources are best spent and will refuse to “prop up” companies that do not have a future.
The most recent “second wave” outbreak in Victoria will no doubt provide further challenges, should additional states prepare for lockdowns.