More modest growth in insolvency appointments predicted.
Since our last look at the insolvency market in October last year, things have remained quiet. The Federal Government rushed through new insolvency laws at the end of 2020 amid concerns that 2021 would see a ‘tsunami’ of appointments. However, the theory that as COVID-19 related stimulus was wound back, we would see a significant uptick in insolvencies hasn’t played out in reality.
December quarter 2020
The Australian Financial Security Authority’s (AFSA) personal insolvency statistics for the December quarter of 2020 recorded an overall drop of 54.4% compared to the December 2019 quarter. This was another record drop, exceeding last quarter’s then record fall by 4.4%.
As would be expected, all three forms of appointments saw significant declines:
- bankruptcies fell by 53.0%
- debt agreements fell by 58.0%
- personal insolvency agreements fell by 20.6%.
Declines were seen across all states and territories.
Corporate insolvency
The Australian Securities and Investments Commission (ASIC) is also providing regular updates on the number of corporate insolvency appointments, and the situation is similar there, with a fall of 49.8% in appointments between the December quarter of 2020 and 2019.
What about 2021 so far?
The results for the end of 2020 are not surprising. The significant COVID-19 stimulus measures remained mostly in place until 1 January 2021. However, now that the majority of protections and stimulus have ended, we would expect to see insolvencies starting to return to normal levels in 2021.
With personal insolvencies, that has not been the case, with appointments staying within a few percentage points of the numbers we saw through the pandemic. Appointments are still at around 50% of the long-term average.
We see a similar situation with corporate insolvencies, with numbers remaining at the depressed levels seen through the pandemic. Interestingly, the two new appointment types—small business restructuring, and simplified liquidations—specifically introduced to assist small business impacted by the pandemic have not made an impression, with only two appointments two months into 2021.
What’s next?
It looks unlikely that we will see a large uptick in insolvency appointment volume in the near future and that even a return to historical levels may take some time to eventuate.
With the majority of COVID-19 stimulus and protection measures expired, JobKeeper is the main arm of stimulus that has continued. However, there are relatively few businesses left taking advantage of JobKeeper. During the first phase of JobKeeper, 3.6 million employees took advantage of the scheme. However, by December, this number had already reduced to 1.54 million with approximately 520,000 business and 2.13 million employees having stopped using the scheme since September when JobKeeper 1.0 ended.
Similarly, the Australian Banking Association recently announced that 91% of loans deferred during the pandemic are now back on track.
Based on these metrics and the anecdotal conversations we have with our clients, it looks like the government's stimulus efforts have done their job, perhaps too well with many businesses coming out of the pandemic in a financial position that is as good as, or sometimes better than before COVID-19.
The only potential speed bump still to come will be when the Australian Taxation Office (ATO) restarts its debt collection and compliance programs, both of which were halted during the pandemic. The ATO’s debt book has grown by $8 billion through the pandemic, which it filed only five winding up applications in the last 10 months, down by 1,500 from the proceeding 10 months. We would expect to see a measurable bump in insolvency appointments once the ATO resumes its debt collection activity. Even when the ATO starts taking recovery action, issuing director penalty notices and winding up applications, we don’t expect a tsunami, just a return to pre-COVID levels of insolvencies.
Related articles:
ATO debt collection and scrutiny predictions for 2021
4 Nov 2020: Insolvency appointments remain depressed
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