Last month saw the number of insolvencies in Australia rise by 61%. The official statistics released by CreditorWatch indicate that insolvencies increased from 254 external administrations at the start of February to 408 administrations by the end of February 2021.
With JobKeeper set to end on 28th March 2021, it is anticipated that the number of insolvent businesses in Australia is about to increase again. Once the governments covid-19 funding packages are discontinued in March, it is highly possible that there will be a large number of zombie businesses in Australia. This means that many businesses will only be able to afford to employ individuals who are on a JobKeeper subsidy and when that disappears more people will eventually lose their jobs.
The impending rise in insolvent businesses will most likely result in more redundancies amongst Australian workers which is going to be a destabilising force on the nation’s economy. The number of arrears and court cases related to bad debts also tend to surge before insolvency numbers lift.
The rise in insolvent businesses within the first two months of 2021 proceeds the fact that there was a 12 percent decline in external administrations over the duration of 2021. This mainly due to the support offered by various schemes introduced by the government to help businesses survive during the covid-19 pandemic.
Even though there has been an increase in insolvencies, credit inquires have increased by 29 percent. These statistics indicate that trading conditions for businesses are improving. As the covid-19 pandemic is past its peak many businesses are soon likely to return to their normal levels of service which they operated in a world prior to 2020.
The increase in credit inquires demonstrates that businesses are stocking up on and buying underlying material which are needed to make services and products to stimulate economic growth.
The credit inquiry figures for February 2021 are the highest they have been since August 2020. On a quarterly basis, credit inquiries have risen by ten percent in the three months leading up to to February 2021, in comparison to the same period twelve months prior.
On 28th March 2021, the Australian Government is planning to phase out JobKeeper. The payment was originally introduced in March 2020 at the start of the covid-19 pandemic to encourage affected businesses to keep staff employed during the nationwide lockdown.
JobKeeper is a wage subsidy payment made via the tax system. On top of keeping Australians employed, the scheme also aims to stimulate Australia’s economy and to benefit the sectors who were worst hit by the pandemic. In addition to employees, self-employed people and sole traders were included in those receiving the payment.
Business owners and directors need to undertake a simple self-assessment to figure out whether, post-stimulus, they have the capacity to pay staff wages, rent, superannuation and tax. It is critical for business owners and directors to act as early as possible if they are experiencing financial distress.
There are many options a financially distressed business can consider taking. It important to know which process is the right one for your situation and when to use it. There is a massive difference between early intervention, a reactive process, a controlled process and being forced to windup.
On top of keeping Australians employed, the JobKeeper has also aimed to stimulate Australia’s economy and to benefit the sectors who were worst hit by the pandemic. In addition to employees, self-employed people and sole traders were included in those receiving the payment.
Craig Dangar from C&D Restructure & Taxation Advisory says that “I would argue JobKeeper has been a boon for businesses with a fundamentally successful business underlying it but for those on the margins it has been delaying the inevitable. For most businesses the timing of phasing out JobKeeper in March is appropriate, but there are still some sectors that are going to need ongoing support, most notably hospitality, events and to a lesser extent quasi medical (such as laser treatments and cosmetic businesses)” says Mr. Dangar.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we understand that the insolvency waters are rough and finding advice that focuses on you and your business can be difficult. For advice that is independent and without agenda give the team at C&D a call on 07 36086800 or schedule a meeting here via Calendly. We focus on commercial and practical solutions and are not afraid to have the tough conversations.
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