In normal circumstances each year there are thousands of companies which end up (voluntarily or otherwise) in some form of external administration.
In the middle of a pandemic, you would expect that this figure would increase.
Contrary to this however, the figures of insolvency appointments have dropped in 2020. This means that even the usual number of external administrations have fallen from pre-pandemic times let alone the additional expected insolvencies of many businesses severely impacted by the pandemic.
What are the figures?
ASIC has recently released the insolvency statistics for 20201.
The ASIC figures show that insolvency appointments nationally in July – December 2020 are down between 30% to 62.5% for the same period the prior year2.
|Insolvency appointments for 2020||Insolvency appointments for 2019|
The numbers become even more surprising when you look at industries such as accommodation and retail where you would expect an increase in pandemic related insolvency appointments3:
|Insolvency appointments for July - December 2020||Insolvency appointments for July – December 2019|
|Accommodation & food services||269||524|
|Education and Training||25||84|
|Rental, hiring & real estate services||73||83|
What does this mean?
It is concerning that not even the normal number of businesses are entering into some form of external administration.
It is clear that many businesses are relying heavily on the Government's pandemic relief packages. The figures may also be a reflection of the attitude of the ATO and the banks who are significant instigators of non-voluntary insolvency appointments.
The result, however, is that there are likely to be many insolvent companies currently trading ("zombie companies"). The concern with these zombie companies, is that when an insolvency practitioner is ultimately appointed, the number and dollar amount owed to creditors (often trade creditors, employees and the ATO) is significantly more than if these companies had an external administrator appointed earlier.
It is likely when the Government relief cuts out (and the ATO and the banks become more aggressive in their enforcement measures) that there will be an avalanche of insolvency appointments. Unfortunately many trade creditors who traded with these zombie companies will be brought down too and there is likely to be a cascade effect with more and more businesses placed into some form of external administration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.