End of coronavirus support for business could lead to 5,000 insolvencies by June, financial agency warns

The temporary moratorium on insolvent trading has led to a drop in the number of insolvencies, but financial experts believe that is about to change.

In the past three months, three key coronavirus relief measures for businesses – JobKeeper, commercial lease support and the insolvency trading measures – have expired, leaving more businesses at risk of insolvency.

According to CreditorWatch’s February Business Risk Review, 5,000 businesses are likely to become insolvent between April and June.

The estimate is built on data from the Australian Securities and Investment Commission (ASIC), which shows that 3,000 less businesses became insolvent last year compared to pre-pandemic years.

This drop in insolvencies was caused by the raft of relief measures that the federal and state governments established in response the coronavirus pandemic.

JobKeeper provided wage subsidies to businesses that experienced a 30% decline in turnover, and commercial lease support prevented landlords from terminating leases and required landlords to negotiate rent reductions.

SV Partners director Ian Purchas says the changes to insolvency laws meant that businesses could trade while they were insolvent, as long as that trading was in the ordinary course of business.

“You were able to incur that debt because if it was in the ordinary course of your business,” Purchas tells SmartCompany.

The federal government passed the legislation in March last year and then extended it to December. The insolvency relief measures expired in the new year.

Purchas expects more insolvencies from retail businesses in CBDs primarily because of the shift to working from home.

“There’s little doubt that CBD-based hospitality businesses, including coffee shops and restaurants, are likely to suffer more,” he says.

Recently, two well-known hospitality businesses have either been placed into administration or insolvency.

The large hospitality group GG Leasing, which was founded by former Wallabies player George Gregan and is now directed by his ex-wife Erica Gregan, was placed into administration last Friday.

One franchisee in the Shingle Inn cafe network was placed into administration this week, after the Brisbane CBD store reportedly accrued debts worth $145,000.

CreditorWatch chief executive Patrick Coghlan said insolvency numbers have already risen this year, but it was a necessary increase.

There was a 61% jump in external administrations in February 2021 compared to January 2021.

However, February 2021 shows a 50% decrease in external administrations compared to February 2020.

“We need to get back to at least pre-COVID administration levels and away from the synthetic environment we’ve lived in for the past 12 months,” Coghlan said.

Despite finance professionals indicating there will be no tsunami of insolvencies, they still encourage businesses to engage their advisers, accountants and, if necessary, restructuring experts.

Purchas says business owners need to ensure their accounts are accurate and up to date by recording sales and purchases as well as doing cash flow analysis.

“Otherwise, it’s very difficult to be able to make an informed decision,” he says.

“And, if you don’t fix something now, it’s going to be harder to fix later.”

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