Insolvency could be an opportunity for transformation

By Tony Zhang|26 October 2020
Insolvency could be an opportunity for transformation

The current economic environment presents an opportunity for Australian businesses to transform their operations through strategic restructures and emerge even stronger, according to a new report.

An increase in insolvencies is expected once insolvent trading relief ends on 31 December this year, after which small businesses with liabilities of up to $1 million will be subject to a new process being introduced by the government.

Ahead of the budget, the government has announced new rules that will allow small businesses at risk of collapse to continue to work out their problems instead of appointing an administrator.

The federal government’s COVID-19 temporary relief measures and how they are influencing R&I trends is the main theme of this year’s Clayton Utz report From Red to Black publication.

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Clayton Utz restructuring and insolvency (R&I) specialists in the fresh-look 2020 edition of the firms market-leading From Red to Black publication explored hot-button R&I issues and their wider industry impacts, as well as important technical developments off the back of recent court decisions.

Brisbane partner Scott Sharry and co-authors stated that while the governments reforms are arguably interfering with the natural and unavoidable process of “creative destruction”, they also present a “unique opportunity for businesses to take stock and, with appropriate support, effect a successful restructure

This is particularly the case, they argue, given that private equity firms are scouting acquisition opportunities following steady growth and low-interest rates. However, they also call for the relief measures to be lifted “as soon as reasonably possible in order to allow the natural economic process of creative destruction to occur”.

There are also the questions of whether there will be a “flood” of formal insolvency appointments once the governments support measures are wound back. 

Partner Jennifer Ball suggested that its too early to tell despite conventional wisdom pointing to that outcome as inevitable. 

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“While the Governments small business insolvency reforms (due to take effect on 1 January 2021 after the temporary relief measures end) may help some businesses to stay afloat, others may simply be in too late a stage of financial distress to take advantage of the new legislation,” she said.

The new reforms enable businesses with debts under $1 million to develop a restructuring plan with a specialist adviser within 20 days which, if approved by creditors, means the business can continue trading.

Since temporary relief measures was introduced in March the number of companies entering external administration has been unusually low compared to earlier years (at a time of unusually bad conditions) suggesting a build-up of zombie companies waiting to die.

Under the current insolvent trading law, directors are expected to immediately stop trading when they know or have reasonable grounds to suspect the company is insolvent. Directors who “give it a go” and try to trade their way out of financial difficulty face severe legal consequences: personal liability, a fine of up to $1.11 million per offence or a prison sentence of up to 15 years in extreme cases.

Many industry bodies including the Law Council of Australia have stated it is not particularly suited to small businesses.

Clayton Utz R&I national practice group leader Timothy Sackar, who is leading the Clayton Utz team advising Virgins administrators, Deloitte, said 2020 would be remembered as an extraordinary year and a confronting and sobering lesson for some on how to manage a company with zero revenue”.

“In Australia and abroad, markets and sectors in 2020 have waded through a pandemic, political pressures and economic volatility on a global scale. But that doesnt mean we cannot see some general trends (and opportunities) emerging in restructuring and insolvency,” he wrote.

Of whats in store for the future, he observed: “At some point relief packages will end and companies will be forced to face their own true profitability – or mortality.”

Insolvency could be an opportunity for transformation
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