And will take a long time to change.
Since our last look at the insolvency market in March this year, insolvency appointments have remained depressed.
The start of 2021
Corporate insolvency appointments have remained well below long-term averages through the first five months of 2021. There has been an average of 82 corporate insolvency appointments/week since the start of 2021. While a slight increase on the 80 appointments/week that took place last year while the government’s business insolvency protections were in place, it is just over half of the long-term average of 161 appointments/week.
Additionally, the trend over the year has been relatively flat, with no signs that appointments are starting to trend upwards.
The government’s new small business restructuring insolvency solution, has also continued to have an immaterial impact. Year to date we have only seen nine appointments, with three in the last month.
It is a similar story with personal insolvency appointments, with appointments tracking at approximately half the long-term average. New personal insolvency appointments average 193/ week through the first five months of 2021, down from both the pandemic period (248/ week) and the long-term average (421/week).
Why are appointments so low?
It was widely predicted that there would be a significant uptick in insolvency when insolvency protection expired on 1 January 2021 and again, when the JobKeeper program expired on 31 March 2021. In both cases, these events had no impact on the number of insolvency appointments.
There are three key drivers for the insolvency market remaining depressed.
First, it has become clear through the start of 2021, that the government over-stimulated the economy through the COVID-19 pandemic onset. In particular, extending the JobKeeper program through March 2021 looks to have been unnecessary, as the program’s expiry didn’t result in an uptick in unemployment rates. This “over stimulus” has left many business and households in a better position than when they entered the pandemic: with healthier savings and balance sheets.
Second, the Australian Taxation Office (ATO) has continued to defer recovery action. It is now taking the position that it will not commence any winding up actions until the next financial year (with no indication of when in the next financial year this will occur). As I discussed in March, the ATO debt books have grown significantly through the pandemic period as it took a very accommodating approach to recovery. This has allowed many businesses to use the ATO as a source of financing to allow an otherwise unviable business to continue.
Third, during the pandemic, many households and business took the opportunity to save a significant amount of the stimulus they received. This has resulted in a significant pool of cash (Treasury estimates the pool of savings at $200b) available to meet debts and costs going forward. This gives business, households, and the economy as a whole a buffer that will delay insolvency through the post-pandemic period.
I expect that the current low levels of insolvency appointments will be the new normal for the rest of 2021. The three structural influences keeping insolvencies low outlined above will take some time to work through the economy. However, as the ATO inevitably ramps up its enforcement and collection activities through the end of 2021 and into 2022, and business and households exhaust the savings war chest, we will see insolvencies trend back up to historically average levels.
Unless there is another significant shock to the economy, the prospect of an “insolvency tsunami” has now passed us by.